Supreme Court justices skeptical of Aereo, but wary of killing it

April 23, 2014: 5:00 AM ET

At oral arguments over the legality of the service, which streams live broadcast TV to smartphones, the Court seemed fearful of hampering other cloud-service businesses.

Aereo CEO Chet Kanojia leaves the U.S. Supreme Court following oral arguments

Aereo CEO Chet Kanojia leaves the U.S. Supreme Court following oral arguments on April 22, 2014

FORTUNE -- At Tuesday's oral arguments concerning the legality of Aereo, a service that beams live broadcast TV to computer and smartphones without paying any copyright royalties to broadcasters, the Justices seemed puzzled, tormented, and searching for an out.

Broadcasters, including Walt Disney's (DIS) ABC, CBS's (CBS) CBS Broadcasting, and Comcast's (CMCSA) NBCUniversal, are asking the Justices to shut Aereo down for copyright infringement.

Though several Justices were skeptical of Aereo's business model—which they clearly thought circumvented the spirit, if not the letter, of the copyright laws—some fretted about inadvertently throwing a wrench in dozens of nascent, and poorly understood cloud-services businesses not involved in the case.

"I don't understand what the decision for you or against you, when I write it, is going to do to all kinds of other technologies," Justice Stephen Breyer said to Aereo's counsel, David C. Frederick of Kellogg, Huber, Hansen, Todd, Evans & Figel.

"I've read the briefs fairly carefully," he added, "and I'm still uncertain that I understand it well enough. That isn't your problem—but it might turn out to be," he added, provoking laughter. (I was not present at the argument, but am relying on the Court's official transcript.)

Two Justices, Breyer and Sonia Sotomayor, wondered aloud if the Court should even remand the case—send it back to the district court—for further argument on whether Aereo might meet the definition of a "cable provider," even though all the parties agreed that it didn't. (Such status would qualify Aereo to pay broadcasters a below-market-rate fee, but a fee all the same, and one that would likely doom its business model.)

Sotomayor also repeatedly asked lawyers about other specific technologies—including Roku, Simple.TV, and NimbleTV—which the attorneys sheepishly admitted they were simply not prepared to address.

MORE: Why Supreme Court might pull plug on Aereo

Only Justice Ruth Bader Ginsburg seemed both resolutely opposed to Aereo and confident of her ability to explain why. She seemed to reject Aereo's basic claim that it merely supplied customers with equipment, not programming. "They give the subscriber a menu," she said, "and it says you can get any of these things. … They're providing you these choices and those choices are content."

Aereo, founded by inventor Chet Kanojia and backed by Barry Diller's IAC/InterActive Corp. (IACI), provides a service that allows subscribers, for about $8 per month, to watch live over-the-air TV on smartphones, tablets, and other computers. (It does not carry cable programming.) From a birds-eye view, Aereo looks to be engaged in the retransmission of broadcast television to the general public. In 1976, Congress specified that such retransmission implicates the broadcasters' copyrights in the "public performance" of their programming. For that reason, cable and satellite providers pay broadcasters retransmission fees for the privilege of showing their programming.

Aereo doesn't pay those fees. It says it doesn't have to because, upon close examination, it is not really a retransmitter at all, but rather merely an equipment provider—albeit a provider of equipment that is located in the cloud. Basically, as I explained in a detailed legal analysis of Aereo's business on Monday, Aereo's technology is a riff on the old bunny-ears antennae that our parents or grandparents used to use to watch the Sid Caesar show for free. In each of the 13 television markets where it currently operates, Aereo maintains a warehouse filled with vertically-oriented blade servers equipped with thousands of tiny, thumbnail-sized antennae. When a subscriber wants to watch a TV show, Aereo temporarily assigns her one of those antennae, which captures the free, over-the-air signals available at the warehouse and then begins recording them on a tiny virtual DVR, which is also temporarily assigned to that individual subscriber. If the subscriber indicates that she wants to "watch" rather than save the recording for later viewing, Aereo's equipment will begin transmitting her the program from her own personalized DVR recording after a 6- or 7-second buffering delay.

At least three of the justices seemed deeply suspicious of the intentional inefficiency of Aereo's system—the use of thousands of antennae where, as a pure engineering matter, one would suffice—a design feature whose only apparent benefit was its arguable circumvention of the copyright laws.

"I mean, there's no technological reason for you to have 10,000 dime-sized antennae, other than to get around the copyright laws,"Chief Justice John Roberts, Jr., told Aereo's Frederick.

"Was [federal appeals court judge Denny] Chin right when he said there there was no technically sound reason to use these multiple antennas?," Justice Ginsburg asked him. "That the only reason for that was to avoid the breach of the Copyright Act?"

"Is there any reason you did it other than not to violate the copyright laws?," asked Justice Antonin Scalia.

Frederick told all of these justices that there were other reasons, although his answers were vague and, sometimes, puzzling. "It is much simpler," Frederick told the Chief Justice, for instance, "if you're a start-up, to add components, to add modules when you're starting up, ramping up."

Frederick's more plausible answer—which no justice directly took issue with—was that even if Aereo was exploiting a loophole in the law, so what? Why is exploiting a loophole necessarily illegal?

"Efficiency is not a consideration under the Copyright Act," he told Justice Ginsburg. And to the Chief Justice he parried, "The point of the copyright laws . . . ,  Your Honor, shouldn't turn on the number of antennas. It turns on whether the person who is receiving the signal that comes through the Internet is privately performing by initiating the action of that antenna getting a data stream."

But much of the argument focused not on Aereo at all, but on other cloud-based businesses that the justices feared they might inadvertently snuff out in the cradle if they ruled against Aereo. A trade group for Google (GOOG), Apple (AAPL), Amazon (AMZN), and others, the Computer & Communications Industry Association, had raised these concerns in a brief written by a team led by Kathleen Sullivan of Quinn Emanuel Urquhart & Sullivan, who is also a former dean of Stanford Law School.

What happens if broadcasters lose the Aereo case?

The association's chief concern went like this. Aereo claims that it merely sends private, individual transmissions to each subscriber at the subscriber's individualized request. So if the Court rules that Aereo's transmissions of 10,000 private transmissions actually amount, in aggregate, to a "public performance," what will that mean for cloud-storage companies like Google Drive?  If 10,000 Google Drive subscribers independently upload their individually purchased copies of a popular song to their cyberlockers, and then, later, individually stream their own music back to themselves, will it follow that Google Drive will now be liable for infringing the "public performance rights" of the song's copyright holders?

The broadcasters' counsel, Paul Clement of the Bancroft law firm, insisted that the situations were easily distinguished.  "There's a fundamental difference," he argued, "between a service that . . .  provides new content to . . . any paying stranger, and a service that provides a . . .  storage service. . . . If you want a real world analogy, it's the . . . difference between a car dealer and a valet parking service. I mean, if you look at it from 30,000 feet, you might think, hey, both of these things provide cars to the public. But if you looked at it more closely, you'd understand, well, if I show up at the car dealership without a car, I'm going to be able to get a car. If I show up at the valet parking service and I don't own a car, it's not going to end well for me."

Deputy solicitor general Malcolm Stewart, representing the federal government—and, hence, the perspective of the U.S. Copyright Office—seconded Clement's argument. "Using [Clement's] example of the valet parking, [or] using a comparable example of a coat checkroom," Stewart said, "there are situations all the time in which people place property momentarily at the disposal . . . of another and then retrieve it later. . . . It's distributed to them at that later date, not in their capacities as members of the public, but as the true owners of the property."

But Aereo's Frederick countered that whatever the policy merits of these arguments, they weren't grounded in the pertinent statute. "I note that my friend did not reference the words of the Transmit Clause at all when he offered that distinction," he argued, alluding to the key passage of the copyright law at issue. "And that's actually quite important, because in order to [make his distinction], you have to make up words to put them in the Transmit Clause."

The broadcasters' attorney, Clement, had the last word and, with it, he invited the justices to step out of the weeds, and zoom back to the 30,000-foot level, where the broadcasters' arguments have always looked their best.

"[A]t the end of the day," he said, "[Aereo's] argument simply blinks reality. They provide thousands of paying strangers with public performances over the TV, but they don't publicly perform at all. It's like magic."

And it is. But the question is: Does this magic violate the copyright laws?

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