/ Copyright

VidAngel vs Hollywood Studios: Examining The Ongoing Legal Saga

The Provo-based startup is being sued for infringement and violation of the Digital Millennium Copyright Act. Here’s where everything currently stands.

This article was originally published in the Spring 2017 edition of Silicon Slopes Magazine.

In July 2016, Disney, Lucasfilm, 20th Century Fox, and Warner Bros filed a lawsuit against local startup VidAngel for infringing the studios’ exclusive rights under the Copyright Act and for violating the Digital Millennium Copyright Act. In response to the filing of the lawsuit, VidAngel CEO Neal Harmon released the following statement:

“Disney, Lucasfilm, 20th Century Fox, and Warner Bros have filed a complaint against VidAngel in federal court. We wish they would have let us know they had issue with VidAngel back in July 2015 when we wrote them a letter to inform them about VidAngel’s lawful service. However, we’ve hired great Hollywood attorneys. We’re as confident now as we were when we launched that filtering a DVD or Blu-ray you own on your favorite devices is your right. We’re ready. More to come.”

VidAngel — which allows users to buy a movie for $20, watch it, then sell it back for $19 — has tried to set its service apart from the CleanFlix and CleanFilms of yore, who created edited copies of DVDs then burned derivatives to sell to customers. Those businesses were ultimately shut down. Harmon explained, “Unlike CleanFlix and Cleanfilms, VidAngel doesn’t change any of the original content. VidAngel is more like a very powerful remote control. Anything you can do manually on your own computer, you can also use VidAngel to accomplish.” He added, “VidAngel is completely legal.” It seems Disney, Lucasfilm, 20th Century Fox and Warner Bros disagree.

The lengthy complaint filed by the plaintiffs cited a number of reasons why the studios consider VidAngel’s services illegal. The studios claim that VidAngel does not possess the rights (rights that they require other video-on-demand services to purchase) to stream movies and television shows and is circumventing technological protection measures to create unauthorized copies of those movies and television shows to stream to customers. This practice, the plaintiffs allege, violates the Copyright Act.

The studios are also less than thrilled that VidAngel has been able to offer streamed content before other video-on-demand services and at a lower cost. The complaint states, “If left unabated, VidAngel will undermine the Plaintiffs’ relationships with their authorized licensees and interfere with Plaintiffs’ ability to negotiate with those legitimate VOD services.” In other words, if VidAngel continues to grow, other streaming services will be less willing to pay studios for exclusive rights to content already available on VidAngel. Streaming services less willing to pay studios for exclusive rights means less money for those studios. VidAngel has disrupted the marketplace in a real way, and big players in Hollywood don’t like that one bit. Customers, on the other hand, love cheaper, quicker access to new movies.

A short while after new of the lawsuit broke, VidAngel released another statement introducing their lawyers. VidAngel hired Baker Marquart to represent them in the lawsuit.

Baker Marquart is known for helping FilmOn win a copyright case against major networks and studios. The VidAngel statement read, “With their representation, FilmOn obtained a landmark ruling in the Central District that FilmOn could legally apply for the same compulsory licenses available to large cable companies.”

VidAngel also hired David Quinto to write their legal opinion. Quito represented the Oscars for 27 years and has plenty of Hollywood insider knowledge that VidAngel hoped would help them win the lawsuit.

“We’re very proud of our legal team. We’re confident about our case. And we’re excited to tell our story to the judge,” the statement read.

About a month later, the legal drama reached Law and Order levels when VidAngel filed a countersuit. Baker Marquart LLP filed the suit in U.S. District Court, stating that the movie studios’ “carefully selected and misleading allegations distort relevant facts and law” by “suggest [ing] that VidAngel needs their permission to offer a filtering service, despite Congressional law which expressly authorizes VidAngel’s service without need for any such consent.” That “Congressional law” is the Family Entertainment and Copyright Act of 2005 which states that so long as content is screened from an authorized copy of a motion picture (VidAngel matches a DVD to each user), consumers can filter out unwanted content. VidAngel provides consumers the technology necessary for that filtering.

Marquat wrote that by asking to shut down VidAngel, the studios are “asking that the Court repeal a federal statute enacted to protect American families.” Marquat also alleged that the original suit is the studios’ attempt to expand their copyright monopoly and “deprive consumers of their right to buy and sell copyrighted works.”

“We hope that the filing will help these studios to realize that they are asking the court to shut down a service that will allow millions to filter content for themselves and their children,” said VidAngel CEO Neal Harmon. “This case is completely, 100% about filtering, and as that becomes clear in the legal process, we are confident that the courts will uphold the law of the land.”

Later, VidAngel announced that attorney David W. Quinto resigned his position at a prestigious Hollywood law firm to lead VidAngel’s defense. To people not in the know, people like me, that means nothing. But people familiar with entertainment law read that and yelled “SHUT THE FRONT DOOR!”

“It’s like Derek Jeter leaving the Yankees and joining the RedSox,” said VidAngel spokesman Matthew Faraci. Faraci explained that Mr. Quinto has over thirty years of experience defending Hollywood big timers, including plaintiffs in the VidAngel case. So why the sudden 180? Mr. Quinto explains, “I have never before been adverse to a studio. I just think that in this instance, the studios are wrong, and I like to feel that I’ve always tried to be on the right side of the law and I’m confident that [in joining VidAngel] I am.”

Obvs, the VidAngels are thrilled to have Quinto on their side. CEO Neal Harmon said, “David’s decision to join VidAngel as General Counsel represents the single most significant development in the case to date.” Harmon praised Quinto’s career successes which include representing the ©OSCARS, the ACADEMY AWARDS® and the Producers Guild of America. Quinto has also represented clients dealing with matters of Internet law, much like the matter VidAngel finds themselves dealing with now. “There is no one better suited to oversee our legal strategy,” Harmon said. “[Tuesday]’s announcement demonstrates [Quinto]’s full confidence that values consumers seeking to filter content will prevail in court.”

One could infer, if one were inclined, that Quinto would not have left his prestigious position to fight this case if he did not believe this case is one VidAngel can win. “I think VidAngel has the better side of the legal argument by far,” Quinto said in a phone interview. “Legislative history of the Family Movie Act reflects that Congress felt strongly that the American people should have the right to watch filtered content and that right should exist as a reality. The ability to watch filtered content should be as cheap and easy and widespread as possible.” Quinto explained that VidAngel and ONLY VidAngel offers the means for consumers to easily, affordably, and legally access filtered content. “It seems that because Congress affirmatively wanted to make this service available, and because VidAngel is complying with the letter of the act, it has the better side of the argument,” Quinto said.

Let’s talk more about that argument, shall we? I had quite a few question as to how VidAngel planned to defend their services in court. Mr. Quinto answered many of those questions during our phone interview.

I first asked about the studios’ claim that VidAngel needs their permission to decode DVDs. “Everyone who watches a DVD must decode it,” Quinto explained. “So long as Hollywood has been selling copies, they have been encrypted.” Encryption (which must be decoded) existed before the Family Movie Act, so the studios’ assertion that VidAngel needs their permission would make the Family Movie Act a right available only on paper and not in reality.

Mr. Quinto then addressed the studios’ claim that VidAngel makes unlawful copies of the studios’ content. “It is a necessary step in providing their service that VidAngel not only decode the disc, but that they make a copy. That is a technological requirement,” Quinto explained. The coded copy of a film is tagged to identify objectionable content, then broken into segments and sent to servers that make it possible for consumers to stream the content fluidly. “That is all necessary to provide the very service that Congress expressly authorized,” Quinto said.

Copyright law is where things seemed a little murky for me, given my lack of a law degree. While researching the issue, I read some opinions that stated what VidAngel does is a violation of copyright law. Quinto claimed that in fact, it is not. “Within copyright law there are some broad exceptions that apply. What I’ve argued so far is that what VidAngel does is squarely in the law,” he said. Quinto explained that even if the court rejects Quinto’s explanations for decoding and copying content, VidAngel can still argue that what they do falls under Fair Use. “Under the Fair Use analysis, one looks at the benefit to the public and the harm to copyright law. Here there is no harm to the studios,” Quinto said. The studios pointed to the Digital Millennium Copyright Act in their complaint but Quinto said the DMCA does not apply in this case. “The DMCA that [the studios] rely on was enacted in response to the very widespread file sharing that was occurring with music. That is not the situation. There are no copies going on the internet. The studios are not being deprived of any realities,” he said. Quinto also mentioned that the 9th Circuit Court has ruled that a transformative work does not infringe on the original work. By filtering content VidAngel is transforming original works.

But what about the streaming license the studios claim VidAngel needs to stream content? “The Family Movie Act says that if you do certain things, you are lawful, period. Anything else that follows is irrelevant,” Quinto said. The filtering model authorized by Congress does not require a streaming license. Under VidAngel’s model, requiring a license would be double charging since VidAngel purchases actual physical discs per customer streaming a film at any time. “The consumer, having purchased the disc, has the right to watch that disc without having the license to do so,” said Quinto. What’s making the studios mad is VidAngel’s ability to offer content earlier and for less money than other streaming services. The weird thing about that though is that VidAngel would love to purchase a streaming license. That’s a whole lot of work, time, and money saved if VidAngel could stop purchasing thousands of discs, storing those discs, and auditing those discs. And if they had a streaming license, there would be no limit to the number of customers that could watch any of VidAngel’s titles. As it is now, the number of customers streaming a title must match the number of physical discs VidAngel has in its vault. But the studios won’t sell VidAngel a streaming license.

Once upon a time The Directors Guild entered into an agreement with the studios. Directors argued that movies are works of art and that when movies are altered, the artist is degraded. So the studios agreed that they would not permit alterations. But then they did. They alter films to be shown on television. They alter films to be shown on airplanes. They alter movies anytime doing so will mean making large sums of money. It seems VidAngel, as disruptive as it is, is still relatively small, and so considered by studios as unworthy of the right to alter — and therefore stream — the content they so subjectively defend. The directors made their artistic integrity argument before congress when the Family Movie Act was being debated, and congress decided that the argument held little if any water since the compromises studios and directors make in the process of film production are well documented. “Ultimately I believe that when VidAngel becomes sufficiently large and successful, the studios will change their position and grant streaming licensing,” Quinto said.

And he was confident that VidAngel will become large and successful because he believes the law is on their side. “VidAngel is consistent in protecting the rights of content owners to be paid. And VidAngel is providing the service that Congress has said should be available to American people. This is not a situation where people are trying to get around the law,” he said.

VidAngel later announced that Max Blecher of Blecher Collins & Pepperman and Peter K. Stris of Stris & Maher LLP joined Quinto and Baker Marquat LLP, rounding out VidAngel’s legal dream team. VidAngel CEO Neal Harmon described Blecher and Stris as “renowned attorneys whose collective work has literally reshaped jurisprudence in America.”

Max Blecher has a long and successful career in antitrust law and will lead VidAngel’s countersuit against the studios. “The studios’ repeated attempts to foreclose any means for VidAngel to offer its filtering service to families exposes the studios to significant liability,” said Blecher.

Peter K. Stris, one of the nation’s top Supreme Court advocates, was hired to advise VidAngel on how to best win not only the initial lawsuit, but any appeals the studios may make after after the verdict. “Like many disruptively innovative companies, VidAngel has become a target, and our firm has now been engaged because VidAngel is planning for a long fight against the studios’ high-priced legal talent,” Stris said. “We look forward to being a part of an unprecedented team of attorneys who have banded together because we believe in the rights of families to watch what they want in their own homes.”

David Quinto echoed Stris’ sentiments. “When attorneys are attained, they are frequently just hired guns,” he explained. “They might not believe in what a client does. But if a client’s activities are not unlawful, they will put aside any moral reservations and represent the client. That is not what’s going on here. [These lawyers] believe in the cause. They believe in VidAngel.” Quinto said he could not be more delighted with the addition of Blecher and Stris. “I fully expect that our new dream team will function seamlessly,” he said.

The next step for VidAngel and its legal team was a preliminary injunction hearing. The studios had requested that VidAngel’s operations be stopped for the duration of the lawsuit and during the hearing a judge would decide whether or not that request should be granted. “I am as confident as I have ever been in any matter that the court will deny the injunction request for a number of reasons,” Quinto said. Among those reasons was the studios’ inability to prove irreparable injury. Last year Quinto wrote to the studios to put them on notice as to what VidAngel was doing. The studios waited nearly a year after receiving Quinto’s letter to file their complaint, which is far too long for someone suffering true irreparable injury. The studios also had to prove that granting the injunction would be in the public’s best interest, which promised to be difficult given VidAngel’s mountain of evidence that shows that the public supports access to filtered content. Namely, the $10 million raised by adoring customers.

Let’s talk about that $10 million. Listen. I’m no stock broker. But I DID spend 15 minutes on Investopedia and learned that there are rules to making a smart investment: find a sensible index fund, diversify your portfolio, buy low sell high blah blah blah. BORING. Or, hear me out, you could say “screw you, risk tolerance,” and invest a large sum of money in a company facing a lawsuit and possible injunction.

If the latter option sounds appealing, boy did you miss your opportunity. On October 31, VidAngel wrapped up their mini IPO, having raised $10,159,434 from 7,556 investors. That puts the average investment at $1,344. Which, I mean, I don’t know your financial situation, but that’s not money I’m willing to bid farewell to forever unless I know it’s helping a cause I truly believe in, which is certainly the case with many of these mini IPO investors. “People and families are not going to take it this time,” said VidAngel CEO Neal Harmon. “VidAngel has become a rallying point for everyone else. They want this fight to be fought and won.”

“If we look at the history of edited movie companies, the public psyche perceives edited movies as unlawful,” Harmon said. “We wanted to create a historical event in America that brings attention to filtering movies, and show that it is legal, and that there is a market for it.” And that’s what the mini IPO, which will fund the fight all the way to the Supreme Court if necessary, has done.

VidAngel announced their plans to allow the public to invest in their company two weeks prior to being sued. Suspicious timing, amirite? Their plans at the time of announcement included the standard scaling growth dreams most startups have, but quickly pivoted to taking their fight all the way to the Supreme Court once the suit was filed.

VidAngel, after consulting with its legal team, determined that they would need $5,000,000 to make it to the highest court in the land without going broke. They raised that $5,000,000 in 28 hours. Then they quickly raised the additional $5,000,000, and had to turn away investors, and investments over the maximum amount allowed, $25,000(!!!)

Harmon said the sum “adds to this growing body of evidence that America is not going to settle this time around,” as do the 40,000 people who donated to VidAngel’s litigation fund, the 50,000 people who signed a petition to save filtering, and the 20,000 people who signed an additional petition.

Harmon described waking up the morning after raising the initial $5,000,000, and feeling the weight of stewardship. “It strengthens our resolve as a team to ensure that families have this right,” he said. “VidAngel now has a responsibility to see this through to the end.”

Harmon and his team made it very clear that customers’ investments is money they may never see again. “This is an extremely risky investment. People should expect that they could lose everything,” he said. “People are going in with their eyes wide open.” However, Harmon also stated his every confidence, and the confidence of his investors, that this is a fight VidAngel will win. “I’ve put my own money and years of my life into this company, I believe, and allies believe, that ultimately justice is on our side,” Harmon said. “We’re all in this together.

The Preliminary Hearing, which took place in November, did not go as the VIdAngel team hoped it would. Attorneys from Disney, 20th Century Fox, LucasFilm presented their arguments in the hopes of having VidAngel’s operations stopped, and VidAngel’s attorneys presented their arguments in the hopes of preventing an injunction. Then they had to wait for the judge’s decision.

“Our legal team, led by David Quinto, did a first-rate job presenting the facts of the case, detailing why our customers should continue to have the right to filter content as the larger legal process plays out. We look forward to the decision of the Court,” Harmon said. “VidAngel is on a rock-solid legal foundation because we built our company to strictly comply with the 2005 Family Movie Act, a law that clearly protects and encourages entertainment filtering services, without requiring the permission of major studios.”

Harmon also expressed appreciation for the judge presiding over the case. “Judge Birotte was extremely well prepared and took the time to ask a series of thoughtful questions,” he said. “We’re grateful that Judge Birotte is taking the case very seriously given its impact on untold millions of American families, and look forward to the next opportunity to present the facts of the case.”

Not long after, Federal Judge Andre Birotte, Jr. granted the studios’ request for a preliminary injunction against VidAngel. During the preliminary hearing VidAngel argued that it was in the public’s interest to protect every person’s right to watch filtered content, and issuing a preliminary injunction would undercut that right. In his ruling, Judge Briotte said that this argument “strongly relies” on the claim that VidAngel is “the only filtering service under the (Family Movie Act) that supports streaming digital content to mobile devices, tablets and smart TVs,” then cited ClearPlay which offers a similar service. “The public interest can only be served by upholding copyright protections and correspondingly, preventing the misappropriation of skills, creative energies and resources which are invested in the protected work,” Briotte said. “Accordingly, the court concludes that a preliminary injunction is in the public interest.”

So unless VidAngel gets the stay of injunction they are seeking, they will need to remove all of the studios’ movies from the VidAngel library.

Which is a real bummer. But it is not the end. People lose preliminary injunctions and go on to win cases all the time. And even if VidAngel ultimately loses this first case against Disney, Warner Brothers, 20th Century Fox, and Lucas Film, they are prepared to take their case all the way to the Supreme Court thanks to the $10 million raised during their mini IPO. As VidAngel CEO Neal Harmon explained, “Hollywood studios have followed a repeated pattern in their decades-long campaign to put movie filtering services out of business by seeking a shut down decision in trial court. Previously, such a decision has signaled the end of the legal battle. As such, while we are extremely disappointed — for the countless people who rely on our service regularly to enjoy movies using filters — our customers have given us not just the mandate to fight this battle all the way to the Supreme Court, but the financial resources as well. We will aggressively pursue an appeal and take this case to a higher level where we have always believed we will ultimately prevail.”

“The legal battle for filtering is far from over,” said Harmon.” “We are seeking a stay of the injunction, and are appealing the judge’s decision.”

VidAngel requested a stay of enforcement. Judge Birotte denied VidAngel’s request, meaning VidAngel had to remove their content. Harmon said, “VidAngel has received the District Court’s denial of our stay request and is complying. For the time being, movies will no longer be available for filtering. “

Harmon explained that this decision hardly came as a surprise. “Because judges rarely grant a stay of their own orders, we fully expected the Court to rule this way, and had already commenced an expedited appeal of the preliminary injunction,” he said.

When VidAngel failed to immediately remove all their content from their streaming platform, the district court found them in contempt of the ruling and fined them $10,000.

The company is currently seeking an emergency stay from the 9th Circuit Court of Appeals. They are also appealing the preliminary injunction. If things go well, movies will be available to stream again soon. But if not, VidAngel will use the $10 million it raised in their Reg A round to take their legal battle all the way to the Supreme Court.

“VidAngel has had a rough run in the district court. We obviously disagree on almost all aspects of the case,” said Harmon. “The way the district court has approached VidAngel’s case strengthens our resolve for taking it to the next court.”

Harmon explains that multiple members of Congress have reach out to offer their assistance in clarifying the Family Movie Act, and it’s becoming clear that there may be more than one way to move forward. “I know why we should win. I don’t know how exactly we will win, but I believe we will win. There are multiple paths. We believe we’ll win,” Harmon said.

Until then, VidAngel is focusing its efforts on VidAngel studios. VidAngel studios offers originally produced, family-friendly content. That content includes original movies and a weekly family-friendly Dry Bar Comedy Show. “Our content efforts are meant to provide some family-friendly content and connection to our customers,” Harmon said.

But when VidAngel pivoted, they lost multiple functions of the organization that no longer have roles. “While the court was finding VidAngel in contempt we were having a goodbye lunch for our team,” Harmon said.

The company is unsure of when the next court date will be. “The law today can clearly be read in our favor or the studios’ favor. It’s never been litigated before. Political momentum is with us,” Harmon said.

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