Why the Supreme Court might pull the plug on Aereo

Aereo’s antennae

FORTUNE — For two remarkable years the tiny company Aereo, which delivers broadcast TV to smartphones, tablets, and PCs, has walked through the valley of the shadow of death.

Armies of litigators, hired by the nation’s largest media giants, have bombarded it with lawsuits, accusing it of flagrant copyright infringement. All the while, Aereo has protested its innocence. It’s been cleverly engineered, it insists, to slip through the cracks of the copyright regimen the broadcasters are invoking, and — superficial appearances notwithstanding — it is therefore operating completely on the up-and-up.

On Tuesday Aereo will finally plead its case to the nine U.S. Supreme Court justices who will determine its fate. There, Walt Disney’s (DIS) American Broadcasting Company, CBS’s (CBS) CBS Broadcasting, Comcast’s (CMCSA) NBCUniversal, 21st Century Fox’s (FOX) Fox Television Stations, and a half dozen other broadcasting behemoths will ask the Court to pull Aereo’s plug. Ominously for Aereo, the U.S. Solicitor General’s Office — expressing the views of the U.S. Copyright Office and other government agencies — is siding with the broadcasters.

It has been clear since the broadcasters first filed their case in Manhattan federal court in March 2012 that the suit’s outcome would have enormous repercussions for the broadcast and cable industries. But cloud-services providers like Google (GOOG), Amazon (AMZN), and Apple (AAPL) have also recently entered the fray, through their trade group, weighing in on Aereo’s behalf, claiming that their burgeoning, multibillion-dollar businesses may find themselves under a legal cloud if the Court snuffs out little Aereo.

Aereo is the brainchild of engineer and inventor Chet Kanojia, who has had backing from Barry Diller’s IAC/InterActive Corp. (IACI), which indirectly owns 10% of Aereo’s stock. Kanojia’s service currently enables subscribers in 13 television markets to receive live broadcast television on their smartphones, tablets, or computers for a price of around $8 per month. (Cable shows are not included.)

MORE: What happens if broadcasters lose the Aereo case?

Merely enabling TV programs to appear on the screens of mobile devices does not represent much of a technological breakthrough on Aereo’s part; plenty of companies can perform the engineering feats involved. Aereo’s breakthrough is different. Its technology purports to overcome legal obstacles, not engineering ones. Aereo claims to have figured out a way to let its subscribers “Watch live TV,” as its ads put it, while circumventing the legal responsibilities that were, for the past 38 years, thought to be inherent in the provision of such a service.

But not everyone buys into Aereo’s solution. Last April, for instance, federal appeals judge Denny Chin, who wanted to shut Aereo down back then, belittled Kanojia’s accomplishment in a dissenting opinion as “a Rube Goldberg-like contrivance, over-engineered in an attempt to avoid the reach of the Copyright Act and to take advantage of a perceived loophole in the law.”

Since the enactment of the Copyright Act of 1976, retransmitters of broadcast signals have been required to first obtain permission from the broadcasters — who own copyrights to much of the programming encoded therein. Congress has enacted elaborate rules dictating how cable and satellite providers can obtain such permission — sometimes through statutory licenses and sometimes through negotiation. As a result, retransmitters generally end up paying fees for the privilege, and retransmission fees have become a crucial portion of broadcasters’ revenue, especially as advertising revenues wane in an Internet-dominated world.

Yet because of Aereo’s quirky technology — which is in many respects less efficient than existing, alternative methodologies — Aereo claims it can do an end-run around the need to ask such permission.

Basically, Aereo’s technology is a riff on the old bunny-ears antennae that our parents or grandparents used to use to watch the Sid Caesar show. Since TV was born, anyone within range of a broadcaster’s transmission tower has been free to capture those signals with his own personal antenna and then watch free TV. In Aereo’s case, the company maintains, the antennae are simply “in the cloud.”

MORE: With mega-merger, TWC-Comcast should make Aereo into an ally

For its New York customers, for instance, Aereo maintains a warehouse in Brooklyn filled with vertically-oriented blade servers equipped with thousands of tiny, thumbnail-sized antennae. When a subscriber wants to watch a TV show, Aereo temporarily assigns her one of those antennae, which captures the free, over-the-air signals available at the warehouse and then begins recording them on a tiny virtual DVR, which is also temporarily assigned to that individual subscriber. If the subscriber indicates that she wants to “watch” rather than save the recording for later viewing, Aereo’s equipment will begin transmitting her the program from her own personalized DVR recording after a six- or seven-second buffering delay.

So, Aereo asks, what’s the problem? The subscriber is just using her own individual, cloud-based antenna to pull down free broadcast programming, and she’s then recording that onto her own cloud-based DVR. The act of recording free TV shows was famously upheld against copyright challenge in 1984 in the landmark case of Sony Corp. v. Universal City Studios. So the only remaining conceivable question, in Aereo’s view, is whether the last leg of the program’s journey — its transmission from the subscriber’s personalized virtual DVR to her mobile device, tablet, or PC — should be considered a “public performance” of the program, which its copyright holders have a right to control, or a “private performance,” which they don’t. Aereo contends that the transmission is obviously “private,” since the transmission occurs only if and when commanded by the subscriber acting alone, and is capable of being viewed only by her or her immediate friends and family.

“The ‘one-to-one’ transmissions from Aereo’s equipment — individual transmissions from personal recordings created from data received by individual antennas — do not constitute ‘public’ performances,” Aereo argues in its brief, which was written by a legal team led by David C. Frederick of Kellogg, Huber, Hansen, Todd, Evans & Figel.

To understand the broadcasters’ perspective, on the other hand, we need to retrace some history. In 1968, when the Supreme Court first looked at the issue of retransmission of broadcast television signals, it did not think any “public performance” right was implicated. In that case, a cable company was capturing signals on a hilltop, and then sending them by cable to subscribers whose homes were located in a valley where, due to geophysical bad luck, bunny-ears and rooftop antennae were unavailing. The Court reasoned that so-called community antenna TV systems (CATV) did “no more than enhance the viewer’s capacity to receive the broadcaster’s signals,” and didn’t implicate the public performance right at all.

In 1974 the Court issued a very similar ruling concerning cable retransmission of local broadcasting to distant markets, finding, once again, no performance right implicated at all.

The trouble, from Aereo’s perspective, with these favorable Supreme Court precedents concerning business models quite similar to its own, is that Congress explicitly overturned both of these rulings in 1976, and did so in very broad terms. It said that henceforth it was bestowing upon copyright holders an exclusive right over transmissions of “a performance or display” of their work “to the public, by means of any device or process, whether the members of the public capable of receiving the performance or display receive it in the same place or in separate places and at the same time or at different times.” (Emphasis added.) The broadcasters argue the italicized phrases make clear that Congress meant to include services like Aereo, which deliver live TV programming to mass audiences, even though the audience may receive those transmissions “in separate places” and “at different times.”

As the broadcasters look at things, then, Aereo “simply captures over-the-air broadcasts and then, without authorization, profits from retransmitting those broadcasts to its subscribers,” the broadcasters write in the joint brief, which was authored by a team headed by Paul Clement of the Bancroft law firm and Paul Smith of Jenner & Block. “This would seem to be obvious copyright infringement — an entire business model premised on massive and unauthorized commercial exploitation of copyrighted works, where the prices of competitors are undercut because they are licensed and pay fees.”

Because of the breadth of the 1976 reform law, Aereo would never have gotten as far as it has — in fact, would likely have never launched in the first place — were it not for a 2008 ruling by the U.S. Court of Appeals for the Second Circuit generally referred to as the Cablevision ruling (though its formal caption was actually Cartoon Network v. CSC Holdings). In that case, broadcasters and cable programmers tried to block Cablevision from providing subscribers with a remote, cloud-based DVR service. Even though Cablevision had already paid for the necessary licenses to provide all the programming it was providing, the plaintiffs argued that the transmission from the remote DVR now required a separate, additional license, because it amounted to a “public performance” of the recorded program. In rejecting this claim, the Second Circuit found that such transmissions were “private,” since only one person was “capable of receiving” the transmission.

The Cablevision ruling was controversial. Even many who thought the result was correct, thought the ruling’s precise reasoning was wrong. Would transmission of a video-on-demand movie no longer be considered a public performance just because each transmission went to only one customer? Several copyright scholars immediately criticized the Cablevision court’s logic, predicting it would lead to grave complications.

Which soon arrived. Aereo was engineered with the Cablevision ruling specifically in mind. So long as the individual subscriber instructed Aereo to capture each program with an individualized antenna, Kanojia reasoned, and then to make an individual recording of that program, and then to transmit that individual recording back to the individual subscriber, Aereo could effectively provide a live TV service to a mass audience of potentially millions of paying subscribers without ever engaging in any “public” performance and, therefore, without having to pay broadcasters any retransmission fees. Relying on the Cablevision precedent, Manhattan federal judge Alison Nathan upheld Aereo’s business model in July 2012, and the Second Circuit affirmed her ruling last April, again citing Cablevision.

But the Cablevision ruling doesn’t bind the Supreme Court, and the government is now urging the Court to disregard it (or, rather, to find that it reached the right result for the wrong reason): “In Cablevision, the cable company already possessed the necessary licenses to transmit copyrighted television programs to its subscribers,” the government writes. “In contrast, [Aereo] transmits to its subscribers copyrighted content for which no such license exists.” (The government’s legal team is led by deputy solicitor general Edwin Kneedler and U.S. Copyright Office general counsel Jacqueline C. Charlesworth.)

The government rejects Aereo’s attempt to portray itself as a simple provider of individual antennae and DVRs, stressing its status as “an integrated system.” Aereo, it writes, “not only owns, but actively controls, the system of antennas, centralized servers, and software that receives broadcast signals and transmits content to the user … The essence of [Aereo’s] business model is its promise to transmit broadcast programming to any member of the public who is willing to pay a monthly fee … Each of [its] transmissions is therefore ‘to the public’ in the relevant sense, even though each ultimately goes only to a single subscriber.”

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What scares the cloud-service providers about the government’s analysis is that it seems to “aggregate” thousands of private performances of a program into what is now being declared to be a single “public performance” of that program, albeit one received in “separate places” and “at different times.” They worry, then, about misuse of such a principle to seek “performance rights” licenses for what have, until now, been considered the most routine and blameless of cyber-storage practices. For instance, if 10,000 individuals independently store their individually purchased copies of the same popular song on Google Drive, can Google Drive now be held liable for violating the songwriter’s public performance rights each time one of these individuals streams back one of the songs he himself uploaded?

The government claims that the danger is illusory, however. “A consumer’s playback of her own lawfully acquired copy of a copyrighted work to herself will ordinarily be a non-infringing private performance, and it may be protected by fair-use principles as well,” it argues.

When I first wrote about Aereo’s technology in May 2012, I said that “the service looks quite dubious when viewed from 30,000 feet, but becomes more plausible as you get closer and start wading into the weeds.” While I still think there’s some truth to that, after the fuller briefing that’s now available I think this is an easier case than I did back then, and that the broadcasters have the better of the argument. The problem is that Congress has already spoken to what Aereo’s doing, and it has said you can’t do that.

The cloud-service providers aren’t in the same boat — Congress hasn’t addressed what most of them do — and their fear of injury through collateral damage has an overwrought “you’ll-break-the-Internet” quality. With narrow language and a few disclaimers the Court can rule against Aereo without dooming the cloud-service industry, and I suspect that’s what it will do.

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