This is part of a multi-blog series to demonstrate that product design may have—and in many areas of Internet law and regulation, will have—a determining factor for how a product or service is regulated. This first part relates the treatment of cloud services.

Breathing a Little Easier in the Cloud

Recently, the Second Circuit handed down its much-anticipated decision in WNET v. Aereo, Inc., No. 12-2786, 2013 WL 1285591 (2d Cir. Apr. 2, 2013). To the considerable relief of public-facing cloud providers, the Second Circuit reaffirmed its core holding in Cartoon Network LP, LLLP v. CSC Holdings, Inc. (“Cablevision”), 536 F.3d 121 (2d. Cir. 2008), that enabling a user to copy a work and transmit that copy to herself does not result in an infringing public performance simply because the means of storage and transmission are located outside of the user’s home. More than anything, Aereo makes clear that how you design your technology matters.

At first blush, Cablevision and Aereo appear to have little to do with the cloud. Cablevision involved a challenge to the cable provider’s remote DVR (RDVR) system that allowed a subscriber to record and play movies and television programs stored on hard drives located at the cable head-end rather than in the subscriber’s home. In rejecting that challenge, the Second Circuit observed that each copy of a work made by a Cablevision subscriber on a RDVR was accessible only to that individual subscriber, just as if the copy were made on a DVR in that subscriber’s home. Because that copy was accessible to no one else, there was no public performance within the meaning of the Copyright Act’s Transmit Clause and, hence, no copyright infringement. Put another way, a public performance of a copyrighted work did not occur simply due to the length of cord connecting the DVR to the subscriber’s television. The result ensured regulatory symmetry between the treatment of a DVR in a subscriber’s home and a DVR located on Cablevision’s premises.

Aereo extended the logic of Cablevision to over-the-air broadcasts captured and transmitted via the Internet. The Aereo system involves a series of individual, dynamically assigned antennae that capture over-the-air broadcasts and, at the user’s direction, record and transmit broadcasted programs to (and only to) that user’s Internet-enabled device. Thus, where Cablevision concerned a RDVR, Aereo can be thought of as concerning remote antennae, remote DVR and remote Slingbox in one sleek package. The fact that a user’s antenna is located down the street rather than on the user’s rooftop does not create a public performance. Again, the Second Circuit ensured regulatory symmetry between the treatment of a local antennae and one located on Aereo’s premises.

In reaching this conclusion, the court placed utmost importance on certain technological designs such as the use of an individual antennae and copies unique to the individual. The court also made clear that Cablevision’s holding was not confined to particular, pre-approved technologies: “[W]e see no support in Cablevision or in this court’s subsequent decisions for the Plaintiff’s argument that Cablevision’s interpretation of the Transmit clause is confined to technologies similar to the VCR.” Aereo, 2013 WL at *11.

This rejection of a technology-specific reading of Cablevision should be heartening to cloud service providers. The reliance of cloud service providers on Cablevision is hard to overstate. After the Cablevision decision, the average quarterly investment in cloud computing in the United States increased by 41 percent.[sup]1[/sup] By one estimate, the certainty provided by Cablevision led to an additional incremental investment in US cloud computing firms of anywhere between $728 million and $1.3 billion in the 2 and ½ years following the decision.[sup]2[/sup] As the Second Circuit observed in Aereo, “many media and technology companies have relied on Cablevision as an authoritative interpretation of the Transmit Clause. One example is cloud media services, which have proliferated in recent years.”

That certainty should not be taken for granted. Judge Chin’s frothy dissent in Aereo demonstrates that even when technology is designed specifically to bring it within the boundaries of existing precedent, some judges will regard this not as compliance but as “an attempt to avoid the reach of the Copyright Act and to take advantage of a perceived loophole in the law.” Given that it was his lower-court decision that the Second Circuit overturned in Cablevision, Judge Chin’s skepticism to Aereo’s reliance on that precedent is unsurprising. However, Judge Chin is not alone. In the Central District of California, a potential intra-district split is brewing over the persuasiveness of Cablevision. The court in Fox Broadcasting Co., Inc. v. Dish Network, LLC, No. 12-4529, 2012 WL 5938563 (C.D. Cal. Nov. 7, 2012), relied in part on Cablevision in rejecting the Plaintiff’s motion for a preliminary injunction in a case involving a DVR system that permits the recording of an entire prime-time lineup. In the same district, the court in Fox Television Stations, Inc. v. BarryDriller Content Systems, PLC, No. 12-6921, 2012 WL 6784498 (C.D. Cal. Dec. 27, 2012), flatly rejected Cablevision’s interpretation of the Transmit Clause on its way to granting a preliminary injunction against a system that purports to be “technologically analogous” to Aereo’s. Both cases are now before the Ninth Circuit.

What’s at stake in the outcome of these cases is apparent by glimpsing at the recent Southern District of New York decision in Capitol Records, LLC v. ReDigi Inc., No. 12-95, 2013 WL 1286134 (S.D.N.Y. Mar. 30, 2013). There, the court granted summary judgment against a service purporting to be “the world’s first and only online marketplace for digital used music.” Id. at *1. Rightly or wrongly, the court’s decision means that and Apple, with patent applications in hand, will likely sit on any plans for secondary digital markets until there is a clearer signal of any viability of the first sale doctrine in the cloud. Were Cablevision decided differently, Aereo and DISH likely would have done the same.