FilmOn Not a “Cable Provider” Says Ninth Circuit

A recurring narrative promoted by the internet industry and its cheerleaders is that the old creative industry, which relies on copyright law, is “outdated.”  The major rights holders, they keep saying, “cling to old models,” pretending the future is not happening.  Of course this new v old narrative is more than a misleading PR message—it is a gross hypocrisy if you follow the story behind the tweets, headlines, and comment threads.

Because if we were to summarize the story of copyright in cyberspace, it is generally one in which new business models seek to rely rather heavily on loopholes and loose interpretations of old law in order to succeed.  Time and again, the courts try to wrestle with new business ventures, whose owners hope for favorable interpretations of statutes that were written long before their models were imaginable, let alone possible. And much of the time, these “new” businesses represent various ways to exploit creative works without payment or permission.  Such is the case with a service called FilmOn, which hit a major setback this week in the Ninth Circuit Court of Appeals.

Essentially, FilmOn captures television broadcasts via the airwaves and then retransmits the content to paying customers over the internet. Several broadcasters, who are named collectively in the case as Fox, sued on the basis that FilmOn infringes the exclusive right of publicly performance. Like Aereo, FilmOn had argued in several courts that its service does not “publicly perform” works, but when the Supreme Court held that Aereo’s very similar model did infringe this exclusive right, FilmOn changed its defense strategy.

Instead of going for no licensing, FilmOn has been vying for cheap licensing by arguing that the company can be defined as a “cable provider” under the terms of §111 of the Copyright Act. “Cable providers” are eligible for compulsory, government-set licenses which obviate the need to negotiate with individual rights holders for retransmission of creative works.  A district court agreed that FilmOn qualifies as a “cable provider,” but the Ninth Circuit has now reversed that decision. And although the court has stated that both FilmOn and the broadcasters presented plausible interpretations of §111, the opinion appears to have turned on two factors:  context and deference to the Copyright Office.

In its analysis of the exception carved out in §111 with the 1976 Copyright Act, the circuit court notes the balance struck between the interests of copyright holders and the need to serve segments of the population that lived in remote locations.  §111 was designed to enable a network of local cable providers to make the large, capital investments necessary to serve these smaller markets without the added burden of negotiating terms with individual rights holders. Moreover, those cable companies were subject to FCC regulation, including “must-carry” provisions mandating certain content be transmitted just for them to be allowed to operate.  From the Ninth-Circuit opinion …

“… in 1976 the cable industry was a fledgling one; cable systems had little market power and little ability to overcome the considerable transaction costs they would incur if they had to negotiate individual licenses directly with copyright owners. Congress responded to these economic conditions by enacting § 111, which relieved cable systems of the need to sit down with every copyright holder before retransmitting their copyrighted broadcast works. … Fundamentally, however, § 111 was Congress’s attempt to balance the socially useful role cable systems had come to play, on the one hand, against the property interests and creative incentives of copyright holders, on the other.”

By contrast, the court observes that FilmOn is operating in a very different market as a business that a) does not have to make the kind of capital investments as 70s-era cable companies; and b) can reach far beyond a local market to potentially any viewer in the world via the internet.  So, although the court stipulates that FilmOn’s statutory interpretation of §111 is not wholly without merit, the panel ultimately defers to the assumption that Congress intended to maintain balance between protecting copyright and serving the remote markets via the more limited technology that existed at the time the statute was written.

Additionally, in light of its finding that both the broadcasters and FilmOn provide reasonable interpretations of §111, the court gave considerable weight to past testimony by the Copyright Office, which has, since the 1990s, asserted that internet-based companies like FilmOn are not “cable providers” under the terms of the statute.  Quoting from the preambles to the USCO 1992 and 1997 rulemaking proceedings, “… a provider of broadcast signals [must] be an inherently localized transmission media of limited availability to qualify as a cable system.” In other words, the ability to transmit globally via the internet exceeds the intent of §111.

Everything about the rationales applied to write §111, including the three tiers of statutory rates based on system size, is predicated on an analysis of local markets.  This includes matters like local advertisers who pay relatively low rates to reach a local customer base via their “cable providers.”  That small-town hardware store ad you see pays pennies on the dollar compared to a major brand reaching millions via national broadcast, and this factors into the calculus of what makes a “cable provider” eligible for which compulsory license under the terms of the statute.

There is simply no reasonable way to argue that a business like FilmOn, which retransmits a signal to the entire world via the internet, achieves the goals of Congress in establishing the compulsory license regime for “cable providers.” But as I say, this is a recurring theme in the copyright narrative. In the world of PR, these companies portray themselves as new, progressive, forward-thinking, etc.  But in order to avoid paying for the creative works they need to operate, they try very hard in the courts to look like they’re just business as usual.

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