Thursday, August 13, 2009
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Court Revives Suit on Use of DVD Encryption Technology
By SHERRI M. OKAMOTO, Staff Writer
The Sixth District Court of Appeal yesterday revived a lawsuit by a film industry group against a high-end consumer electronics company for allegedly abusing its license to use a proprietary encryption method that secures the millions of standard-definition DVDs sold worldwide.
Reversing the decision of Santa Clara Superior Court Judge Leslie C. Nichols, the panel held that the licensing agreement required Kaleidescape Inc. to comply with design specifications set forth by DVD Copy Control Association Inc. after the contract had been executed.
Kaleidescape, a privately held corporation based in Sunnyvale, makes and markets a home entertainment system that allows users to make permanent copies of movie DVDs onto a hard drive and then access the video library without requiring that the disc be reinserted to the player.
The system is capable of storing over 225 DVDs, and even with a price tag starting at around $8,000, Kaleidescape has reported selling approximately 5,000 units since the product launched in 2003.
While its product was in development, Kaleidescape obtained a license to use the proprietary technology for protecting copyrighted content stored on DVDs, known as the Content Scramble System, in 2002.
License Agreement
The DVD Copy Control Association, which administers and enforced the licenses, provides a standard agreement employing the same terms and conditions for all licensees. Under the terms of this agreement, the licensee promises to maintain the confidentiality of the technology and adhere to confidential technical specifications which the association will provide after the contract is executed in exchange for a master key to incorporate into its equipment.
Upon learning how the Kaleidescape system functioned, the association filed suit against Kaleidescape for breach of contract and breach of the covenant of good faith and fair dealing. It claimed that the Kaleidescape product did not comply with the specifications contained in a document entitled “CSS General Specifications,” which the association insisted was part of the standard license agreement.
By the time of trial, the association had confined its contract claim to the allegation that Kaleidescape had breached one section of the General Specifications which provided that the proprietary technology was “intended to prevent casual users from the unauthorized copying of copyrighted materials recorded on [DVDs],” and another that, according to the association, required that a physical disc be present when the movie is played.
However, Nichols declined to find that the General Specifications were part of the agreement between the parties because it had not been incorporated by reference into the written license agreement.
Without reaching the issue of breach, Nichols determined that even if the General Specifications were part of the overall agreement, its terms were not sufficiently definite to allow for specific performance and that injunctive relief was not available since the association had not demonstrated irreparable harm.
As the association had only sought equitable relief, this ruling deprived it of any remedy and Nichols entered judgment in favor of Kaleidescape.
Writing for the appellate court, Justice Eugene M. Premo reasoned that the incorporation-by-reference doctrine was inapplicable to any of the specifications provided to Kaleidescape after the license agreement was executed since Kaleidescape could not have consented to them without knowing what they were.
But, Premo noted, this result “would be directly contrary to the unambiguous intent of the parties as expressed in the License Agreement, which was that the licensee would comply with the specifications that DVDCCA provided after the agreement was signed.”
Known Risk
As the association could not distribute the confidential information pertaining to its proprietary technology without first securing Kaleidescape’s promise to maintain its confidentiality and both parties to understood that technical specifications would be provided after the license agreement was executed, Premo posited that “Kaleidescape knew that it was taking a risk that the undisclosed specifications might preclude the type of device it planned to make.”
Although the contract was adhesive in requiring Kaleidescape consent to its terms in order to obtain a license, Premo concluded that the requirements contained in the General Specifications did not fall outside Kaleidescape’s reasonable expectations.
He declined to interpret the requirements of the General Specifications or whether they actually applied to the Kaleidescape system.
Turning to the trial court’s conclusion that specific performance could not be granted, Premo explained that the terms of a contract are “not too uncertain merely because a promisor is given a choice of performing in several ways.”
Premo suggested that the General Specifications had set forth a standard by which Kaleidescape’s performance under the agreement could be measured in stating the intent that the proprietary technology was to “prevent casual users from the unauthorized copying of copyrighted materials recorded on [DVDs].”
Acknowledging the parties’ disagreement regarding what such a standard entailed, Premo said “that dispute is for the trial court to resolve when it rules upon the question of whether Kaleidescape has breached this section. Once it does that, any uncertainty should disappear.”
As for the question of whether the General Specifications required the physical presence of a disc in playback devices, that section, “as clarified by the undisputed extrinsic evidence, is not so vague that the court cannot tell what it requires,” Premo added.
Joined by Presiding Justice Conrad L. Rushing and Justice Franklin D. Elia, Premo directed the trial court to decide what the terms of the General Specifications mandated and whether Kaleidescape had breached those terms on remand.
Should the trial court find a breach, it was further directed to determine the nature and extent of the harm and whether it could be remedied by damages. If not, the trial court was told to enforce a stipulation by which the parties had agreed that a breach of the license agreement would result in irreparable harm.
Rushing also wrote separately to advocate for the implementation of guidelines for determining the enforceability of after-disclosed contract terms such as those at issue in this case, DVD Copy Control Association, Inc. v. Kaleidescape, Inc., 09 S.O.S. 4864.
Copyright 2009, Metropolitan News Company