DVD CCA Aims to Prohibit DVD Ripping Once and For All

Kaleidescape just can't get a break these days. The DVD Copy Control Association (DVD CCA), which licenses the DVD encryption system (Content Scramble System, or CSS), wants to add an amendment to its licensing agreement that requires a DVD to be present during playback.

In other words, you can't watch a movie stored on a hard drive, meaning Kaleidescape and its fellow movie-management makers would be in violation of the DVD CCA's licensing agreement.

Here we go again. The DVD CCA already lost its first lawsuit against Kaleidescape, which makes very high-end movie servers. The organization argued that its licensing agreement expressly prohibited the copying of a DVD onto a hard drive.

Kaleidescape said that there was no such stipulation in the agreement, and the judge agreed.

So now the DVD CCA wants to state very clearly that you cannot rip a DVD to a hard drive. Period.

Here's the proposed amendment:

6.4. Certain Requirements for DVD Products. DVD Products, alone or in combination with other DVD Products, shall not be designed to descramble scrambled CSS Data when the DVD Disc containing such CSS Data and associated CSS Keys is not physically present in the DVD Player or DVD Drive (as applicable), and a DVD Product shall not be designed to make or direct the making of a persistent copy of CSS Data that has been descrambled from such DVD Disc by such DVD Product.

If passed, DVD CCA members would have 18 months to comply.

Kaleidescape CEO Michael Malcolm wrote a scathing letter (below) to the decision makers at the Content Protection Advisory Council -- including officials from consumer electronics manufacturers, PC makers and content providers -- condemning the proposed amendment.

Malcolm argues that the group—none of whose members make movie servers -- simply wants to put a competitor out of business. Adding the amendment, he says, violates antitrust regulations.

He writes:

The real purpose of this proposed amendment is to put Kaleidescape out of business by excluding the Kaleidescape System from the DVD playback devices authorized by the CSS License Agreement. You should be aware before you vote on the proposed amendment that you expose yourself, your employer, and the DVD CCA to serious and substantial antitrust liability if you vote for this amendment. Both federal and state antitrust laws outlaw anticompetitive conduct by businesses joining together to put a competitor out of business.

The cries of antitrust violations are not far-fetched. Even the folks at the Electronic Frontier Foundation have suggested that there may be some antitrust issues with the DVD CCA.

The Content Protection Advisory Council was supposed to have discussed the amendment yesterday, June 20, but rumor has it that the vote was delayed.

Letter from Michael Malcolm, Kaleidescape CEO

Members of the Content Protection Advisory Council
DVD Copy Control Association
C/O John J. Hoy, President and Secretary
DVD Copy Control Association
225 B Cochrane Circle
Morgan Hill, CA 95037

Re: Proposed "Unknown Specification Amendment" To Be Discussed At The June 20, 2007 Meeting Of The Content Protection Advisory Council of the DVD Copy Control Association

Dear Member of the Content Protection Advisory Council:

I write to you regarding a proposed amendment to the license agreement governing the encryption system used to encrypt the contents of DVD movie discs. This amendment is currently pending before the Content Protection Advisory Council ("CPAC") of the DVD Copy Control Association, Inc. ("DVD CCA"), the association of movie studios, consumer electronics companies, and computer companies that licenses the encryption system.

This proposed amendment, if enacted, will harm consumers because it will suppress competition in the market for DVD playback devices, block the development of new and innovative products that will give consumers new ways to enjoy the DVDs they own, and interfere with the ability of consumers to exercise their fair use rights under copyright law.

Kaleidescape, Inc. is a fellow member of the DVD CCA and a licensee of the DVD CCA's Content Scramble System ("CSS") used to encrypt the contents of DVD discs. Kaleidescape is an innovative and creative developer and manufacturer of home entertainment systems, as well as a retailer of DVD movie discs for use with its home entertainment system.

Kaleidescape's signature product, the Kaleidescape System, has won every major consumer electronics award in its category. Much like Apple's iPod, the Kaleidescape System permits the consumer to make a secure private copy on a hard disk drive of every DVD and CD that the consumer owns and to play back the stored content in any room within the consumer's home.

The Kaleidescape System helps the consumer by indexing and organizing the content stored on it. Moreover, Kaleidescape has created for its customers an extensive database of information about the movies they own, including the cover art, reviews, and other detailed information about each movie. The Kaleidescape System also has an advanced user interface that allows customers to search the movies they own by many different criteria, including by actor, director, MPAA rating, year released, and running time. In addition, the Kaleidescape System allows parents to control or restrict the movies viewed by their children. By these features, the Kaleidescape System enhances the customer's experience of the movies he or she owns.

The Kaleidescape System actually protects video content more securely than does the CSS encryption system used on the DVD discs themselves: The Kaleidescape System stores video content on a hard disk drive in its original CSS-encrypted form, decrypting it only at the time of playback like any other DVD player. Moreover, the Kaleidescape System wraps the CSS encryption "keys" found on the DVD disc in an extra layer of military-strength encryption.

It is impossible to use the Kaleidescape System to upload or transfer movies to the Internet. The Kaleidescape System is a completely closed system.



It is impossible to "burn" copies of DVDs with the Kaleidescape System. It cannot be used to create pirate or counterfeit DVDs. More information about the Kaleidescape System is available at ka1eidescape.com.

Kaleidescape worked very hard at designing the Kaleidescape System to ensure that it is fully compliant with the CSS License Agreement and that it respects the intellectual property rights of others. Since the introduction of the Kaleidescape System almost four years ago, however, the DVD CCA and certain of its members have campaigned to injure Kaleidescape's business and harm its sales of the Kaleidescape System. Most notably, the DVD CCA filed a lawsuit against Kaleidescape in December 2004 alleging that the Kaleidescape System breached the CSS License Agreement. We at Kaleidescape vigorously contested the DVD CCA's lawsuit, knowing that the DVD CCA's allegations were meritless, false, and, we believe, put forward in bad faith.

In March 2007, the DVD CCA's unfounded claims came to trial in the Superior Court of California. The Court heard witnesses and received evidence for over a week. In fact, a number of members of the DVD CCA board of directors testified at the trial. After hearing all of the evidence, the Superior Court of California found that the Kaleidescape System was fully compliant with the CSS License Agreement and that sales of the Kaleidescape System had caused no harm to the DVD CCA or its members. I invite you to read the Court's decision for yourself at http://www.kaleidescape.com/company/pr/PR-20070329-DVDCCA.html

In the wake of Kaleidescape's vindication by the Superior Court of California, some of the DVD CCA's members have now put forward a proposed amendment to the CSS License Agreement. This proposed amendment is described by the DVD CCA as "A proposed Unknown Specification Amendment submitted by Chris Cookson [of Warner Brothers], Benn Carr [of Walt Disney Studios], Jeffrey Lawrence [of Intel], Gabe Beged-Dov [of Hewlett-Packard], David Harshman [of Toshiba] and Andy Parsons [of Pioneer], members of the DVD CCA Board of Directors, to add a Section 6.4 to the CSS Procedural Specifications respecting certain requirements for DVD Products." A copy of the proposed amendment is attached to this letter. This proposed amendment will be considered by the CPAC at its June 20, 2007 meeting for adoption as part of the CSS License Agreement.

There is no valid business justification for the proposed amendment. After hearing all the evidence at trial, the Superior Court of California expressly found in its decision that the DVD CCA and its members have suffered no harm from the Kaleidescape System. To the contrary, the first thing many Kaleidescape owners do is to purchase hundreds of additional DVDs.

The real purpose of this proposed amendment is to put Kaleidescape out of business by excluding the Kaleidescape System from the DVD playback devices authorized by the CSS License Agreement. You should be aware before you vote on the proposed amendment that you expose yourself, your employer, and the DVD CCA to serious and substantial antitrust liability if you vote for this amendment. Both federal and state antitrust laws outlaw anticompetitive conduct by businesses joining together to put a competitor out of business.

The purpose of the antitrust laws is to promote competition and innovation, and thereby benefit consumers with products and services that are better or cheaper than the ones previously offered. The innovations of the Kaleidescape System are an example of the consumer benefits that fair and vigorous competition provides.

The United States Supreme Court has made clear that those who use a standards-setting organization to engage in anticompetitive activity and harm competitors can be held liable under the antitrust laws. Because of the potential for abuse, "private standard-setting associations have traditionally been objects of antitrust scrutiny." Allied Tube €3 Conduit Corp. v. Indian Head, Inc., 486 U.S. 492,500 (1988). "There is no doubt that the members of such associations often have economic incentives to restrain competition and that the product standards set by such associations have a serious potential for anticompetitive harm. Agreement on a product standard is, after all, implicitly an agreement not to manufacture, distribute, or purchase certain types of products." 486 U.S. at 500.

When members of a standards-setting organization like the DVD CCA set standards for the purpose of excluding a competitor from a market, they commit an antitrust violation. American Society of Mechanical Engineers, Inc. v. Hydroievel Corp., 456 U.S. 556 (1982). As the United States Supreme Court said in Hydrolevel, "a standard-setting organization like ASME [the American Society of Mechanical Engineers] can be rife with opportunities for anticompetitive activity. Many of ASME's officials are associated with members of the industries regulated by ASME's codes. Although, undoubtedly, most serve ASME without concern for the interests of their corporate employers, some may well view their positions with ASME, at least in part, as an opportunity to benefit their employers. When the great influence of ASME's reputation is placed at their disposal, the less altruistic of ASME's agents have an opportunity to harm their employers' competitors through manipulation of ASME's codes." 456 U.S. at 571.

The members of CPAC and of the DVD CCA board of directors are in a unique position to collude to promote an anti-innovation agenda on behalf of their corporate employers and to restrain competition and innovation within the consumer electronics and computer industries. That is exactly what the proposed amendment is intended to accomplish by putting Kaleidescape out of business and deterring other innovative companies from entering the market. The proposed amendment will harm consumers by denying them access to new and innovative products like the Kaleidescape System and by obstructing their ability to make fair use of the DVD movie discs that they own.

In closing, we request that you reject the proposed amendment. Instead, we invite you and your employers to join with us in working together to bring to consumers new and innovative products and services that enhance and expand the consumer's enjoyment of great entertainment.

[signed]

Michael Malcolm Founder, Chairman, and Chief Executive Officer Kaleidescape, Inc.