Aereo: The fight is not over

July 12, 2012, 7:28 PM UTC

By Roger Parloff, senior editor

FORTUNE — Aereo, the web TV startup backed by IAC/Interactive Corp. (IACI), won a huge legal victory yesterday, fending off extinction at the hands of the major television networks, who say its service violates their copyrights.

But whether the victory will amount to a full pardon or a mere stay of execution has yet to be determined. The plaintiffs, led by Disney’s (DIS) ABC, NBC Universal (CMCSA), CBS (CBS), and Fox (NWS), will seek an immediate appeal. And even while ruling in Aereo’s favor, U.S. District Judge Alison J. Nathan hinted that she would have come out the other way if she were not bound by the language of an unusual 2008 appellate court ruling.

Aereo, which is currently available only to New York City residents, charges subscribers $12 per month to enable them to watch live and recorded over-the-air broadcast television stations (but not cable) on their Apple (AAPL) iPhones, iPads and web browsers.

When a cable company or satellite provider, like ComCast or DirecTV (DTV), retransmits broadcast television signals to subscribers, it has to pay the copyright owners (broadcasters and television studios) for the privilege. That’s because, under the law, such a retransmission is considered a “public performance” of the programming, which copyright owners control.

Aereo — the brainchild of engineer/CEO Chaitanya (Chet) Kanojia — claims it’s different, though, and, as a consequence, it doesn’t pay copyright owners squat. It maintains that it simply enables its subscribers to see their own “private performances” of the programs, in the same way that they could if they were sitting in their living rooms watching free, over-the-air TV with an old-fashioned rabbit-ears antenna plucking the signal out of the air.

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Aereo effectively rents the subscriber the modern-day equivalent of his own private, tiny, off-site rabbit-ears antenna. (Aereo keeps several thousand of these antennas — each the size of a dime — in a warehouse in Brooklyn, where they are hooked up to Aereo’s custom-made computer hardware.) Each antenna feeds signals into the equivalent of a DVR which is, again, private to each subscriber. When the subscriber wants to see or record a show, he remotely signals his DVR in Brooklyn to send the program he wants over the Internet to the subscriber’s iPhone or iPad or browser.

The broadcasters say that Aereo’s purportedly innovative technology is actually just an inefficient, convoluted attempt to do an end-run around the copyright laws. If Congress requires cable and satellite providers to pay license fees to retransmit their over-the-air signals—and it clearly does — why shouldn’t Aereo have to do the same?

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In her remarkably lucid, 53-page ruling, Judge Nathan acknowledged that she probably would have ruled for the TV networks “but for” the existence of a 2008 ruling of the U.S. Court of Appeals for the Second Circuit, by which she is bound. In that case — formally known as Cartoon Network v. CSC Holdings but usually just called Cablevision (CVC) — some movie and television studios challenged the legality of Cablevision’s cloud-based DVR service. Not surprisingly, the court found nothing objectionable with a remote-storage DVR, which simply relieved customers of the need to make space for a clunky, set-top DVR in their home.

While there are many distinctions between Cablevision’s remote DVR service and Aereo’s live TV service, the most striking is that Cablevision already was paying copyright holders for the right to broadcast their live signals, while Aereo pays nothing.

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But that wasn’t the way the issue was framed in Cablevision. The problem there was that, to implement its remote DVR system, Cablevision started splitting the broadcast signal stream in two, sending one stream directly to subscribers for live transmission and looping the other through its remote DVR system for later relay to subscribers if and when sought. So in that case, the copyright holders were effectively asking to get paid twice—once for the live stream and once for the DVR stream. It was a bit of overreaching that, as we’ll see, seems to have now come around to bite the copyright holders in the butt.

While there were potentially many reasons the Second Circuit might have ruled for Cablevision in that case, the one it selected was this: “Because each [remote storage] DVR playback transmission is made to a single subscriber using a single unique copy produced by that subscriber, we conclude that such transmissions are not performances ‘to the public,’ and therefore do not infringe any exclusive right of public performance.”

That’s how the Second Circuit saved Cablevision from having to pay copyright holders twice. But now that very same logic seems to protect Aereo from having to pay copyright holders even once! (Reads like an Aesop’s fable, doesn’t it?) “Aereo has made substantial investments of money and human capital in its system,” Judge Nathan wrote in her ruling yesterday, “all in reliance on the assumption that the Second Circuit meant what it said in Cablevision rather than what it did not say. Particularly considering the role of district courts to faithfully apply their best understanding of the Second Circuit’sprecedent, this Court does not believe it would be appropriate to blaze a trail that runs opposed to the direction dictated by Cablevision.”

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In an unusual coda, Judge Nathan noted that the ordinarily most difficult hurdle for a plaintiff to clear in a preliminary injunction case — proof that he faces immediate and “irreparable harm”—was actually met here. She thought so, she wrote, because:

— “Aereo will damage Plaintiffs’ ability to negotiate with advertisers by siphoning viewers from traditional distribution channels, in which viewership is measured by Neilsen ratings, into Aereo’s service, which is not measured by Neilsen”;
— “Aereo’s activities will damage Plaintiffs ability to negotiate retransmission agreements, as these companies will demand concessions to make up for this decrease in viewership”;
— Cable companies might now refuse to pay any retransmission fees to networks if, as one witness testified, Aereo “can take the exact same product for free.’”

Finally, Judge Nathan also declined an invitation by the Electronic Frontier Foundation, a digital rights organization which submitted an amicus brief in the case, to find any general public interest in “free access” to broadcast television. “The same logic,” she wrote, “would support a finding that the public interest favors imposing no copyright restrictions on any form of redistribution of Plaintiffs’ broadcast television, as unrestrained piracy of that content would also increase public access to content broadcast over the free public airwaves. For example, distributing over the internet an infringing bootleg copy of a television program that was initially broadcast on the public airwaves increases access to that program. [EFF’s] argument thus bears an unacceptable resemblance to advocacy that copyright infringement of broadcast television is generally in the public interest, a point on which this Court cannot agree.”