Dealers Concerned About Reach of DVD CCA Suit Vs. Kaleidescape

Kaleidescape, the media server company waging an eight-year court battle with DVD CCA over a licensing agreement related to ripping and archiving DVDs, told dealers last week it intends to keep up the fight, despite a tentative judgment from the Santa Clara County Superior Court on Jan. 9 that supports DVD CCA’s claims. Kaleidescape also told Consumer Electronics Daily it has pushed aside plans to launch a streaming video store in Q1 (CED Sept 20 p1). “We will not be launching the store in Q1 2012,” CEO Michael Malcolm told us in an email. “We're focused on making it great, and we won’t open the store until it’s fully ready."

Malcolm told us the company “has filed objections to the tentative decision, and if those objections are not successful, we plan to appeal.” In his letter to dealers, Malcolm said: “The DVD CCA, controlled by the six large movie studios in concert with some of Kaleidescape’s competitors, objects to the convenience and innovation of the movie server, and claims that their license prohibits playback of DVDs from hard disk unless the DVD is present.” Kaleidescape won its first trial with DVD CCA in 2007 when the court said Kaleidescape products complied with the Content Scramble System for DVDs. DVD CCA appealed and the case went to the California Superior Court by the California Court of Appeal in 2009 for a second trial.

During the second trial, Kaleidescape presented evidence that its products “fully comply with the DVD CCA license agreement, have caused no damage to the DVD CCA or the motion picture industry, and accelerate the purchase of DVDs by making movies easier to enjoy and more entertaining,” Malcolm said. “Judge [William] Monahan tentatively disagreed.” Malcolm said Kaleidescape was “surprised” at the finding, since in the first trial, the court said Kaleidescape “was in full compliance” with the CSS agreement. “Moreover, in his statement of decision, Judge Nichols noted our good faith efforts to ensure that our products were fully compliant,” Malcolm said.

The news has left “confusion, fear and paranoia” in the dealer ranks, said Tom Doherty, principal of Doherty Design Group, a custom electronics integration company based in Indianapolis. Doherty, who launched the Escient brand of music servers in the mid-90s after designing the product for a custom client, is still on the dealer list although he no longer sells media servers. Doherty expressed concern about what the tentative decision would mean for the installed base of media servers if it becomes final. “There isn’t enough information to know what it means,” Doherty said, which in itself has caused concern among dealers, who call the product and the company reliable and bulletproof and have had positive communications with the company in the past.

"A noteworthy thing about Kaleidescape” is that dealers have been able to count on both the product and the company, Doherty said. Typically, “if there’s an issue with the hard drive or software, the company catches it before the dealer does and communicates it to dealers,” he said. “There’s always an explanation of the situation.” This time, dealers heard about the tentative court decision after an anonymous source tipped off CE Pro magazine, which “looks ugly,” Doherty said. Doherty spoke this week with a peer who’s in the midst of installing a Kaleidescape Blu-ray server in a high-profile client’s home and asked him if he'll continue to spec the product given the murky outlook. “Do you recommend it? Talk about it? Give disclosure and talk about it?” Doherty said. The dealer told him, ‘I don’t really know. We're concerned and we haven’t heard from Kaleidescape.'"

Dealers aren’t only concerned about new business but the installed base of users and how far a decision could reach to products already sold. “Is the installed base safe?” Doherty said, “or can the judge say ’turn all the things off.'” A Kaleidescape system, which is connected to a network, theoretically “can be rendered inoperable remotely,” Doherty said. With little information from Kaleidescape, “all dealers can do is speculate,” he said. The worst-case scenario is that the system would be shut down completely, he said, but another possibility might be that consumers still own what’s on the server, since they had to purchase the content before it could be installed on the system. “Maybe new things that you buy can no longer go on it?” he said.

The possibilities are ominous for dealers. “The people who own those products are the most well-heeled, well-lawyered up clientele you could have,” Doherty said. Will clients “go after dealers to collect on errors and omission insurance that dealers might not have, or do they go after Kaleidescape?”

In his letter to dealers, Malcolm said, “It is very important to us that our dealers have the latest information about this matter. When a final decision is handed down, we will provide you with another update.” DVD CCA told us, “it is very pleased with the tentative decision, but it is tentative, and we prefer to refrain from further comment until a final decision is issued.” Neither party could say when that decision would come down.