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DVD Copy Control Association, Inc. v. Kaleidescape

August 12, 2009

DVD COPY CONTROL ASSOCIATION, INC., PLAINTIFF AND APPELLANT,
v.
KALEIDESCAPE, INC., DEFENDANT AND RESPONDENT.



Trial Judge: Hon. Leslie C. Nichols (Santa Clara County Super. Ct. No. CV031829).

The opinion of the court was delivered by: Premo, J.

CERTIFIED FOR PUBLICATION

The Content Scramble System (CSS) is the standard technology used to prevent unauthorized copying of movies and other copyrighted content stored on DVDs. Defendant Kaleidescape, Inc. (Kaleidescape), licensed CSS from plaintiff DVD Copy Control Association, Inc. (DVDCCA), in order to develop a home entertainment system for viewing movies distributed on DVD.*fn1 The system Kaleidescape developed is capable of storing and organizing content from thousands of DVDs. Once stored in the Kaleidescape system, the DVD content may be played back at any time, without the need to reinsert the physical DVD. This feature of the system simplifies the storage and organization of very large DVD collections. It also allows users to make permanent copies of borrowed or rented DVDs so that a user could amass a sizeable DVD library without purchasing a single DVD.

DVDCCA sued Kaleidescape for breach of contract and breach of the covenant of good faith and fair dealing. DVDCCA alleged, among other things, that, because the Kaleidescape system allowed users to make persistent copies of DVDs and did not require the physical DVD for playback, it did not comply with specifications contained in a document entitled "CSS General Specifications" (General Specifications), which, DVDCCA maintained, was part of the agreement between the parties.

After a court trial, the trial court entered judgment for Kaleidescape. The trial court found that General Specifications was not part of the agreement between the parties because it had not been incorporated by reference into the written agreement Kaleidescape executed (License Agreement). Without reaching the issue of breach, the trial court also held that, even if General Specifications was part of the overall agreement between the parties, its terms were not sufficiently definite to allow for specific performance and injunctive relief was unavailable because DVDCCA had not shown it would suffer irreparable harm. Since DVDCCA had sought only equitable relief, this ruling deprived it of any remedy.

We shall reverse. We conclude that the mutual intent of the parties at the time the License Agreement was signed was that DVDCCA would grant Kaleidescape permission to use CSS in exchange for the payment of an administrative fee and Kaleidescape's promise to build its system according to specifications that DVDCCA would later provide. This promise is express and complete on the face of the License Agreement. The undisputed extrinsic evidence shows that General Specifications was one set of specifications that DVDCCA provided to Kaleidescape pursuant to this arrangement.

As to the remedy, a specific performance order cannot be crafted unless and until the trial court decides that Kaleidescape is in breach. Resolution of that issue will clarify the meaning of the terms. Further, the License Agreement contains a stipulation that a breach would result in irreparable harm. If Kaleidescape has breached the License Agreement, then the trial court should enforce the stipulation absent a finding that DVDCCA would have had an adequate remedy at law.

We shall reverse the judgment and remand with directions that the trial court determine whether Kaleidescape has breached the License Agreement and, if so, to determine the appropriate remedy.

I. FACTUAL BACKGROUND

DVDs are convenient media for storage and distribution of motion pictures and other audio and video works. "Unlike motion pictures on videocassettes, motion pictures contained on DVD's may be copied without perceptible loss of video or audio quality. This aspect of the DVD format makes it particularly susceptible to piracy." (DVD Copy Control Assn., Inc. v. Bunner, supra, 116 Cal.App.4th at p. 245.) Because of this, the movie studios were reluctant to release movies on DVD absent some system to protect their valuable content. CSS was developed to provide that protection. "Simply put, CSS scrambles the data on the disk and then unscrambles it when the disk is played on a compliant DVD player or computer." (Ibid.)

In order to ensure that all DVD devices can play CSS-protected DVDs, the industries involved--entertainment, consumer electronics, and information technology--decided to license CSS to any manufacturer desiring to make DVD equipment or components. Over the course of more than 100 meetings involving negotiations among industry and consumer representatives, the standard License Agreement was adopted. DVDCCA was formed to administer and enforce the license. DVDCCA does not separately negotiate the licenses; the terms and conditions are the same for all licensees. Under the CSS licensing scheme, a licensee identifies the type of device it plans to make by selecting from a list of 14 "membership categories." The licensee promises to maintain the confidentiality of the CSS technology and to adhere to confidential technical specifications that DVDCCA will provide. In exchange for these promises and the payment of an administrative fee, the licensee receives a master key to incorporate into its equipment along with the technical information it needs to utilize CSS. (See DVD Copy Control Assn., Inc. v. Bunner, supra,116 Cal.App.4th at p. 245.)

Kaleidescape wanted to develop a system that could organize very large collections of DVDs and allow the user to view movies in any room of the home. Kaleidescape determined that in order to do this it would have to obtain a license for CSS. Kaleidescape concluded that the type of device it planned to make would fall into the CSS licensing categories of "Video Descrambler" (Descrambler) and "Authenticator Module for CSS Decryption Module" (Authenticator). Accordingly, Kaleidescape executed the License Agreement, paid the administrative fee, and requested technical specifications for Descramblers and Authenticators. DVDCCA then sent Kaleidescape a master key, specifications for Descramblers (Title 609), specifications for Authenticators (Title 809), and General Specifications. Utilizing the specifications DVDCCA had provided, Kaleidescape completed development of its system and shipped it to dealers in August 2003.

The system Kaleidescape developed stores and plays DVD content by means of three components: the reader, the server, and the player. When a DVD is placed in the reader, the reader imports the content from the DVD and an exact copy of the DVD is permanently preserved on the server. The user may then play the content stored on the server without the need to reinsert the DVD. Kaleidescape was careful to design the system to protect the digital signal path between the DVD keys and the player so that the decrypted content could not be pirated. But, because CSS works the same way for all movies on DVD, the Kaleidescape system cannot distinguish between the user's own movies and those the user may have borrowed or rented. Therefore, the reader will import content from any DVD the user inserts, regardless of the source. Although the Kaleidescape system has no physical way to prevent this, the company recognized that this feature of its system would be a problem for content owners and rental businesses. Therefore, Kaleidescape requires all purchasers to sign an agreement by which they promise to import content only from DVDs they own. The system reminds the user of this promise each time it imports a new DVD. After the DVD content is imported and stored, the system displays a "nag screen," which asks the user to confirm that he or she either owns the DVD or will delete it from the server.

When DVDCCA became aware of how the Kaleidescape system functioned, it was concerned that the system did not comply with the pertinent specifications for CSS. In or about December 2003, DVDCCA demanded that Kaleidescape cease manufacturing and selling its system until modifications could be made to bring it into compliance. Kaleidescape representatives met with representatives from DVDCCA in January 2004 but were unable to convince DVDCCA that its system complied with the license requirements. Further attempts to resolve the dispute were unsuccessful. DVDCCA filed this lawsuit on December 7, 2004.

II. PRETRIAL PROCEDURAL BACKGROUND

By the time of trial, DVDCCA had confined its contract claim to the allegation that Kaleidescape had breached sections 1.5 and 2.1.2 of General Specifications (sections 1.5 and 2.1.2). Section 1.5 stated that CSS "is intended to prevent casual users from the unauthorized copying of copyrighted materials recorded on [DVDs]." Section 2.1.2 described the requirements for playback of DVD content, which, according to DVDCCA, included the requirement that the physical disc be present in the device when the movie is played.

Trial was scheduled to begin on March 19, 2007. Kaleidescape's first trial brief explained that the overall CSS license had five components: the License Agreement, the Procedural Specifications, Title 609, Title 809, and General Specifications. The gist of this first brief was that none of these documents prohibited the creation of persistent copies of DVD content or required the physical DVD to be present each time the content is played.

On March 20, 2007, just as the evidentiary phase of the trial was set to begin, Kaleidescape filed a supplemental trial brief entitled, "Lack of Incorporation of CSS General Specifications into the CSS License Agreement." In this brief, Kaleidescape explained: "As part of its review of the DVD CCA's allegations, Kaleidescape has now come to realize that nothing in the CSS License Agreement references and incorporates [General Specifications] into the parties' contract." The brief goes on to argue, apparently for the first time, that General Specifications was not part of the agreement between the parties. On March 27, 2007, Kaleidescape filed a second supplemental brief expanding upon the analysis of the March 20, 2007 brief. Both briefs relied solely upon the language of the licensing documents in arguing that General Specifications was not part of the overall agreement. This new theory did not challenge the applicability of Titles 609 and 809. Indeed, Kaleidescape conceded that it was bound to comply with these specifications.

III. TRIAL

A. The License Agreement

The threshold issue for the trial court was whether General Specifications was part of the agreement between the parties. Thus, the court first considered the terms of the License Agreement--the document Kaleidescape executed prior to receiving any of the technical specifications. The License Agreement commenced with the recital: "This CSS LICENSE AGREEMENT (the "License Agreement'), including the related CSS PROCEDURAL AND TECHNICAL SPECIFICATIONS (together, the "Specifications') and the Exhibits and Attachments to the License Agreement and Specifications (collectively, this "Agreement'), is made and entered into by and between [the parties]." The writing stated that the purpose of CSS is "to provide reasonable security for content on DVD Discs and thereby, together with the terms and conditions of this Agreement, to provide protection for such copyrighted content against unauthorized consumer copying . . . ." The license granted was a "worldwide, royalty-free, non-exclusive, nontransferable right . . . . [¶] . . . to use and implement CSS to develop, design, manufacture and use DVD Products" in the membership categories selected.

In section 9.5, the parties acknowledged that the movie studios were third party beneficiaries of the License Agreement and that compliance with the terms of the License Agreement "is essential to maintain the integrity and security of [CSS] and to protect prerecorded motion pictures contained on DVD Discs." Section 10.7 provided that there could be no modification or waiver of the agreement that "would have a material adverse effect on the integrity or security of CSS" or the third-party protections provided under section 9.5. Article 5 included extensive confidentiality obligations.

A description of the licensing process began in Article 3, which directed the licensee to choose a membership category, the selection of which told DVDCCA what type of device the licensee planned to make. Section 4.1 then explained: "Upon Licensee's selection of one or more Membership Categories in accordance with Article 3 and the payment of the appropriate Administration Fee(s), Licensor shall distribute to Licensee the portions of Proprietary Information and/or CSS Specifications appropriate to its Membership Category . . . ." Section 4.2.1 specified, "Licensee shall comply with the CSS Specifications, as may be amended by Licensor from time to time in accordance with the [DVDCCA] By-Laws. Each DVD Product shall comply with the version of the CSS Specifications which is in effect at the time such DVD Product is manufactured . . . ."

"CSS Specifications" was defined as "the documentation relating to CSS entitled "CSS Specifications' (including the Procedural Specifications and the Technical Specifications) that Licensor makes available to Licensee, as such documentation may be revised from time to time consistent with Sections 4.2 and 10.7 hereof. Except where otherwise specifically stated, all references to "CSS Specifications' shall be deemed to include all or any portion of the documentation referenced in the preceding sentence."

Exhibit C to the License Agreement was entitled "CSS Membership Categories and Fee Schedule." Exhibit C listed 14 membership categories, including the Descrambler and Authenticator categories. There were check boxes next to each category for the licensee to indicate which of the membership categories it was requesting. Beneath the list of categories was a list of "Technical Specifications Titles" and the note: "To obtain a Specification from DVD CCA, licensee (or potential licensee) must have a fully executed CSS License . . . ." There followed a list of seven titles corresponding to the membership categories for which technical specifications were available, with check boxes for the titles and number of copies requested. Titles 609 and 809 were listed. General Specifications was not.

B. Extrinsic Evidence

1. Kaleidescape's Evidence

The trial court admitted all extrinsic evidence in support of the parties' respective interpretations of the License Agreement. Kaleidescape's evidence focused upon the language of the documents. Kaleidescape's founders explained that, prior to entering into the License Agreement, they had consulted the DVDCCA website where they found two publicly available licensing documents: the License Agreement and a document entitled "CSS Specifications." The latter document contained two parts: "Procedural Specifications," and "Technical Specifications." Procedural Specifications was a lengthy description of the licensee's obligations. Technical Specifications was a single page stating, "Technical Specifications are provided to Licensee based on Licensee's membership in one or more of the following categories. Licensee receives only those portions applicable to the categories for which it is a member." There followed a list of seven membership categories, which included the Descrambler and Authenticator categories. Kaleidescape signed the License Agreement, paid the administrative fees, and, using the order form on exhibit C, requested Titles 609 and 809, the technical specifications for the Descrambler and Authenticator categories. It did not request General Specifications because General Specifications was not listed anywhere in the publicly available documents.

After receiving the three sets of specifications--Title 609, Title 809, and General Specifications--Kaleidescape set to work to interpret them and build its system. Several Kaleidescape witnesses commented upon how difficult the license was to interpret and how they were unable to obtain any help from DVDCCA. Daniel Collens, one of Kaleidescape's founders, and Stephen Watson, Kaleidescape's Chief Technology Officer, both testified to their understanding that only Titles 609 and 809 applied to the Kaleidescape system. Collens examined the specifications to determine whether they imposed any limitations that had not been apparent from the publically available documents "that would prevent Kaleidescape from manufacturing and selling the types of products it was considering building." He explained, "What I settled on based on my training in mathematics and logic was, okay, what's the document that we executed . . . and then I worked through the very different areas and clauses of that agreement to find out what rights and obligations they--they expressed. [¶] And that's what led me through these references to the CSS specifications. The bulk of the normative language there is in the procedural specification section and then . . . there are references to the technical specifications, and that incorporates the two documents; one for the DVD descrambler and one for the authenticating module." Watson said that he had "looked very carefully at both the technical specification that applie[d] to Authenticators and the technical specification that applie[d] to descramblers."

Kaleidescape's expert, Daniel Harkins, testified that, because of the way the Kaleidescape system operated, the alleged disk-in-tray requirement of section 2.1.2 did not apply to it.*fn2 As to section 1.5, which stated that CSS was "intended to prevent casual users from . . . unauthorized copying," Harkins testified that its language was "informative," not "normative." In normative language, "there are typically key words that specify what one must do, what one should do and what one may do. . . . And these guide an implementor to creating a product that would be interoperable with another independent operation." Informative text, on the other hand, "talks about the intent of the normative text or the reasoning that the standards bodies had for writing this normative text. It puts the reader in a certain frame of mind or gives him sufficient context in which to read the normative text." Section 1.5 was informative because, "It specifically talks about the intent of the standard and not necessarily . . . how one would go about implementing that standard. There are no key words in here that would guide an implementor into what he must, should or may do. It merely specifies the reasoning behind having something like the DVD video content scramble system."

2. DVDCCA's Evidence

DVDCCA's evidence focused upon Kaleidescape's conduct. DVDCCA introduced memoranda, generated prior to Kaleidescape's entering into the License Agreement, which showed that the company had always been concerned with how its system could protect DVD content. Founders' meeting notes from July 2001 asked, "How do we authenticate that the user has legit permanent copy of the movie?" Another note from the same period reflected a similar concern: "Product must be clearly designed to defeat any circumvention of the copy protection functions. Can the PVL [Personal Video Library, an early working name for the Kaleidescape system]be construed as circumventing?" The same note observed that the contemplated system would allow a person to borrow a DVD and import its contents into the Kaleidescape system, creating a permanent copy in the system library "forever." "[T]his becomes a value--loss proposition for content owners and rental businesses because there is no repeat business ever if everyone were to own an HVL [sic, probably should be PVL] product. Rental business will die, and retail business will suffer because borrowing once to have a permanent copy forever seems too good to forego for the average consumer." Another memo warned that any system that did not use the physical DVD for playback was "not going to cut it" with DVDCCA.

Watson explained at his pretrial deposition that Kaleidescape knew that it would probably have to license CSS in order to build the system it planned. Knowing that it would not be given the technical specifications until after it executed the License Agreement and paid the administrative fee, Kaleidescape went forward, he said, and "chose to risk the possibility that the full CSS License would turn out to be unacceptable to us." He agreed that the company understood prior to entering into the License Agreement that "that the license may not have permitted the product [they] were contemplating."

DVDCCA president, John Hoy, acknowledged that General Specifications was not listed as a technical specifications title in the License Agreement or in exhibit C. This, he explained, was because General Specifications, which included the general CSS security requirements, was not optional. It was "intended for use by all [membership] categories that also receive a technical specification." All licensees who selected a membership category that required specific technical specification, automatically received General Specifications, as well. General Specifications was delivered to Kaleidescape, along with Titles 609 and 809, the master key, and a CSS license certificate, in a single shipment promptly after the license was executed. The three sets of specifications were formatted identically, bore the same version number, and each were designated confidential.

DVDCCA introduced a memo prepared by Watson after Kaleidescape had received the package of specifications but before this dispute arose. The memo, a compliance analysis that Watson transmitted to the founders in June 2003, revealed Watson's understanding that General Specifications was one of the previously undisclosed sets of CSS specifications to which the License Agreement referred.*fn3 At his deposition, Watson continued to define the pertinent CSS technical specifications as "the general specifications and the specifications for the particular membership categories to which we belong."

DVDCCA's expert, Brian Berg, like Daniel Harkins, rendered an opinion on the issue of breach. Presuming that General Specifications was part of the agreement, Berg testified that the Kaleidescape system breached the License Agreement because it allowed casual users to make unauthorized copies of DVDs and to play DVDs from the copy stored on the server rather from the DVD itself. Berg found the unauthorized-copy prohibition in section 1.5 and the disk-in-tray requirement in section 2.1.2.

C. The Trial Court's Ruling on CSS General Specifications

The trial court gave a lengthy proposed decision from the bench, beginning: "I conclude that no part of [the License Agreement] specifically calls out in clear words the General Specifications. So it--from the text of [the License Agreement] alone is not part of the contract." The court found that there "was no real ongoing relationship between the parties in their conduct that would give real help to the court related to how they mutually intended to be carried out." The court concluded, "the General Specifications . . . are not part of the contract signed by the parties." By way of clarification, the court added, "The court adopts the analysis of Kaleidescape's trial brief, filed on March 20th of 2007, and the brief . . . filed on March 27, 2007."

The trial court went on to make several findings. "[C]ertainly the testimony of defense witnesses, to the effect the plaintiff asserts, the court does not adopt that interpretation. I saw this as a case in which everyone tried to do discovery in a way to kind of make up for the fact that nobody sat down and met and talked. [¶] And I do adopt and find credible not the claim that the defendant corporation ab initio, or as they say, from the beginning, conspired and planned--I'm somewhat overstating, but not much--the plaintiff's thesis to dodge and weave and violate the terms of the contract. But rather that hard money was put down in an entrepreneurial environment taking a risk, that that risk was enhanced by the fact that they really couldn't get answers in the contract formation process. The documents were delivered and analyzed. And I've heard the testimony of everyone at the defendant who said they tried to analyze it. The court finds it credible."

Prior to reciting its proposed decision, the trial court had summarized the testimony of every witness. The court summarized DVDCCA's expert, Brian Berg, as testifying to his conclusions that "defendant's actions were noncompliant with the terms of what [Berg] understood to be the contract." The court stressed, however, "The court alone interprets the contract. But the court also acts as a fact-finder to determine what was the contract."

As to Kaleidescape's expert, Daniel Harkins, the court stated: "And he testified to his review--he was a designated expert witness as well. And he testified that the General Specifications are informative, not normative. And he talked about what people in his line of work do to take these documents and apply them, as these people with specialized knowledge do, to apply them to their tasks to carry out their assignments. [¶] And he said that the General Specifications were not the normative documents that people in his line of work use to determine what shall and shall not be done, what may or may not be done, what must or must not be done. Instead they were inspirational, aspirational goals."

Further on, the court made findings with respect to the expert testimony: "I give credit to the--and resolve the conflict in experts not in favor of Brian Berg, but in favor of Daniel Harkin's interpretation. It makes sense that this is a contract that is not touchy feely, but is strong and normative and tells people what their obligations are.

"Especially--and I do find that the--that there is really no conflict. Having resolved it, the court's quite readily able to determine this without resort to [Civil Code section] 1654, but the court does resort to that as well because the lawyers say there's an ambiguity. . . . [¶] . . . [¶] But the plaintiff had every advantage, the resources of the whole industry and three of them to come together. And in a way, it's as if everybody is responsible, but nobody is responsible. . . ."

After briefly discussing the burden of proof the court went on: "The committee of lawyers worked on this. It ultimately was presented for people to take it or not. I assign no weight to the fact that memos were being prepared in Kaleidescape, or Ph.D.'s and math, logic and everything else, MBA's talking about what they could do and not do. None of that really adds to what was in the contract."

In a written addendum filed after the hearing, the trial court adopted the oral statement as its statement of decision with the clarification that, rather than adopting the analysis contained in Kaleidescape's supplemental trial briefs, the court found the analysis to be "persuasive."

Judgment was entered against DVDCCA on the complaint. This appeal followed.*fn4

IV. DISCUSSION

A. General Specifications Was Part of the ...


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