What is Aereo?
Aereo was a startup that allows people to view and record over-the-air television broadcasts over the Internet. First launched in New York in 2012, the company provided service in about a dozen metro areas in the eastern half of the United States. It suspended service shortly after its Supreme Court loss in June 2014, and filed for bankruptcy in November 2014.
Broadcasters sued Aereo within weeks of its introduction, arguing that streaming their content without permission was copyright infringement. But Aereo disagreed. The TV shows you could watch on Aereo were already available to any customer with a set of rabbit ears. Aereo argued that it was effectively just renting each customer an antenna that allowed the customer to watch these programs on a mobile device instead of a television set. Because the user, not Aereo, selected the programs to watch, Aereo said, it shouldn't have to pay licensing fees.
Aereo's "tiny antennas" scheme might seem like a gimmick, but some legal experts believed the company was on a sound legal footing. Aereo's legal strategy was based on a 2008 court decision that upheld the legality of Cablevision's remote-storage DVR product. The key to Cablevision's victory was the fact that it stored a separate copy of a recorded program for every customer. Aereo argued the same logic should apply to its tiny antennas.
The Supreme Court heard oral arguments in April and ruled against Aereo in June. While the majority insisted the ruling wouldn't endanger other online services, three dissenting justices argued that they had done just that.
What was the Cablevision decision?
In 1984, the Supreme Court narrowly upheld the legality of one of the first video cassette recorders. The ruling laid the foundation for the modern consumer electronics industry, because it shielded manufacturers of media devices from liability for their customers' infringing activities.
Two decades later, the VCR had given way to digital video recorders: set-top boxes that let users record television programs to a hard drive. The cable company Cablevision introduced a product it called a remote-storage DVR. Like a conventional DVR, the RS-DVR allowed customers to record TV shows and play them back later. But instead of being in the customer's living room, the RS-DVR hardware was physically located in a Cablevision data center.
Content owners sued Cablevision, arguing that the company was illegally profiting from the distribution of copyrighted content. The cable company responded that the physical location of its recording equipment was irrelevant for copyright purposes. In Cablevision's view, if a conventional DVR is legal — and the Supreme Court said as much in 1984 — then a remote-storage DVR should be legal too.
In a landmark 2008 decision, the Second Circuit Appeals Court bought Cablevision's argument. Two factors were essential to the court's analysis. First, the user, not Cablevision, controlled which programs to record, and when. And second, the RS-DVR made a separate copy of a program for each user who recorded it. While this was technologically wasteful, it made the RS-DVR more similar to a conventional DVR, and helped the service stay within the confines of copyright law.
The Cablevision decision was important because it provided a solid legal foundation for online "locker services" that allow users to store and retrieve potentially copyrighted files online. For example, in 2011, both Amazon and Google introduced services that allowed users to store their music online and listen to it on any device. Prior to the Cablevision decision, there was some uncertainty about whether such a service infringed the copyrights of the recording industry. The Cablevision ruling made it clear that such services were legal so long as each user's files are stored separately and users control when files are uploaded and downloaded.
What was Aereo's legal strategy?
The entrepreneurs who founded Aereo realized that the logic of the Cablevision decision could also apply to a service that streamed broadcast television content, and they set out to build one. Cablevision won because all of the content recorded by the RS-DVR was chosen by the user, and because the system made a separate copy of a program for each user who requested one. Aereo designed its service to meet those same two criteria.
In Aereo's server rooms were circuit boards with thousands of tiny antennas. When a user logged into the service, the system assigned the user his own unique antenna. When users selected programs to record, the system made a unique copy of the program for each user. Users could then stream these copies to their computers.
Aereo launched first in New York, home of the Second Circuit Appeals Court that produced the Cablevision decision. After being sued by broadcasters and getting a favorable result from the Second Circuit, the company began expanding to other parts of the country. The company got a favorable ruling in Boston, but a judge in Utah ruled against Aereo, effectively banning the service from six western states.
When the broadcasters appealed their Second Circuit loss to the Supreme Court, Aereo took the unusual step of encouraging the Supreme Court to hear a case it had already won. Ordinarily, the winning party in a legal battle would want to avoid further litigation. But the future of Aereo's business depends on getting a clear answer from the courts. Also, Aereo worried that litigation involving less reputable rivals could muddy the legal waters if the Supreme Court didn't hear Aereo's case first.
Who were Aereo's critics and supporters?
The litigation against Aereo was led by ABC and supported by the other major television networks, the National Association of Broadcasters, and many local television stations.
Major content companies also filed briefs urging the Supreme Court to declare Aereo illegal. The National Football League and Major League Baseball, which earn hundreds of millions of dollars selling the rights to their games, wanted the Supreme Court to rule against Aereo. So did many
The broadcasters also had support from the conservative Washington Legal Foundation.
Unsurprisingly, the cable industry supported Aereo. Not only was Aereo's legal argument based on a precedent set by one of their members, but an Aereo win would have greatly strengthened the industry's hand in negotiations with broadcasters. Cable companies pay broadcasters millions of dollars for permission to carry their programming. If Aereo had won, cable companies would have been able to threaten to build their own arrays of tiny antennas, giving them the ability to provide broadcast content to their customers without paying broadcasters a penny.
Interestingly, a handful of small broadcasters also support Aereo. They argued that services like Aereo would help them reach new audiences.
What would have happened if Aereo had won?
Broadcasters portrayed an Aereo victory in apocalyptic terms. In the wake of Aereo's Second Circuit victory last year, both CBS and Fox threatened to go off the air. That would have meant that "broadcast" television would only be available over commercial broadcasting services such as cable and satellite.
Not everyone thought that would be a bad thing. "When CBS threatens to take their content off the air, we should say you guys go do that. That would be great," Randy Picker, a legal scholar at the University of Chicago, told me prior to the ruling.
Many people believed that broadcast television was an inefficient use of electromagnetic spectrum in a world where mobile devices were ubiquitous. Indeed, the FCC was working on a complicated scheme to buy out some broadcasters in order to sell their spectrum at a profit to cell phone companies. If broadcasters had followed through on their threat to go off the air, it would have simplified the process, providing a windfall to the US Treasury.
Of course, the broadcasters' threat to go off the air might have been a bluff. Jason Schultz, a law professor at New York University, told me before the ruling that broadcasters were less concerned about Aereo itself than how an Aereo win could affect negotiations with cable companies. He said broadcasters were "worried that cable and satellite companies will re-architect their systems" to work more like Aereo's service, allowing them to provide users with access to broadcast television without paying licensing fees. That threat would have given cable companies a lot of leverage in future negotiations, costing broadcasters millions in licensing fees.
Another possibility was that if Aereo had won, Congress could have updated the Copyright Act to require services like Aereo to pay broadcasters royalties. Something very similar happened in the 1970s. Cable companies began as "community antennas" services that set up antennas on tall hills in order to provide better reception to households that had trouble getting signals from a pair of rabbit ears. When the courts ruled that these companies didn't owe broadcasters royalties, the broadcasters convinced Congress to change copyright law to require cable companies to pay.
What did people think could happen if Aereo lost?
Before the ruling, many people argued that an Aereo loss could have big implications for the future of the internet economy, though it depended on how broad the Supreme Court's ruling turned out to be.
Aereo bet the company on the 2008 Cablevision decision. While that decision was officially about Cablevision's remote-storage DVR, the case had major implications for "cloud storage" services on the Internet. Services such as Dropbox and Microsoft OneDrive allow users to upload their personal files to secure private storage online. Some services, such as Amazon Cloud Player and Google Music, are specifically designed for users to store their personal music collections.
Cablevision provided the legal foundation for these services, because like the RS-DVR, these services store content only at the direction of users. Aereo supporters worried that if the Supreme Court accepted the broadcasters' arguments against Aereo, it could call the legality of services like Dropbox and Amazon Cloud Player into question.
James Grimmelmann, a legal scholar at the University of Maryland, told me in April that the broadcasters' argument was "so broad that anyone who transmits a work to a stranger or the same work to more than one person is now prima facie an infringer." That could lead to a lot of unnecessary litigation, discouraging investment in new online services.
Others predicted that the Supreme Court could rule for the broadcasters without endorsing their sweeping arguments. Instead, the court could rule against Aereo on grounds that distinguish the service from Cablevision's DVR and cloud storage services. Indeed, a number of parties filed briefs in the case urging the court to do just that.
How did the Supreme Court justices react to Aereo's arguments?
The Supreme Court heard oral arguments in the Aereo case on April 22, 2014. Aereo's video streaming service had a vast array of tiny antennas, each of which is rented to an individual user. The justices seemed to suspect that this was little more than a gimmick to avoid paying fees to broadcasters.
Aereo seemed to face more skeptical questions than the broadcasters did. On the other hand, the justices seemed anxious to avoid a ruling that would imperil the legal foundation of cloud computing services such as Dropbox and Amazon Cloud Music.
Paul Clement, representing ABC, which is suing Aereo, appeared first. The justices peppered him with questions about how Aereo compares to other services. Is Aereo a cable service? Is it like a record store? Like Dropbox and iCloud? At one point, Justice Sonia Sotomayor asked Clement to compare Aereo to "iDrop in the cloud."
"There is a fundamental difference between a service that provides new content and a service that provides a storage service," Clement responded. He analogized it to the difference between a valet service and an auto dealership. In Clement's view, Aereo claims to help users manage stuff they already own, but it's really giving customers stuff they don't own.
Clement also urged the justices not to worry too much about the legal implications for cloud storage. "I don't think the court has to decide [the cloud issue] today," Clement said. "I think it can just be confident they are different."
"I don't find that very satisfying," Justice Samuel Alito shot back. "I need to know how far the rationale that you want us to accept would go."
Next the court heard from Malcolm Stewart, who represented the Obama administration. Stewart echoed the broadcasters' central argument, telling the justices that there is a "distinction between the company that provides content in the first instance [like Aereo] and the company that provides consumers with access to content that they already have [like Dropbox or Amazon Cloud Player]."
But Stewart refused to endorse another one of the broadcasters' arguments: that siding with Aereo would violate US obligations under international treaties.
Aereo attorney David Frederick spoke last, and the justices badgered him to concede that the thousands of tiny antennas in Aereo's data centers were nothing more than a technological gimmick to avoid paying fees to broadcasters. Frederick refused, claiming that using thousands of tiny antennas actually helped the company scale its service up quickly.
The justices didn't buy it. "I'm not saying it's ... necessarily bad," Chief Justice John Roberts said of Aereo's design. "I'm just saying your technological model is based solely on circumventing legal prohibitions that you don't want to comply with. Which is fine. I mean, lawyers do that."
Frederick repeatedly emphasized that Aereo was simply renting antennas and video recording equipment to consumers. Consumers, he said, were the ones who made copies of programs and viewed them. Therefore any liability for unauthorized copies would rest with consumers.
The justices seemed extremely reluctant to overturn Cablevision, a 2008 court decision that helped to establish the legality of modern cloud computing services. On multiple occasions, the justices asked Aereo's critics to assume hypothetically that the Cablevision decision was settled law and suggest arguments that would lead to a different result for Aereo. That suggested some justices want to rule against Aereo in a way that doesn't imperil the cloud economy more generally.
How did the Supreme Court rule?
In a 6-3 decision written by Justice Stephen Breyer, the court sided with the broadcasters. Three of the court's conservatives — Antonin Scalia, Clarence Thomas, and Samuel Alito, dissented.
Some observers were concerned that a loss for Aereo would place music lockers and other cloud computing services in legal jeopardy. The majority was at pains to say that wasn't the case.
"We have not considered whether the public performance right is infringed when the user of a service pays primarily for something other than the transmission of copyrighted works, such as the remote storage of content," Justice Breyer wrote. He said that he agreed with the Obama administration's view that "questions involving cloud computing, remote storage DVRs, and other novel issues not before the court should await a case in which they are squarely presented."
Is the Aereo ruling a threat to cloud computing services?
Many of the arguments broadcasters made against Aereo could just as easily be made against conventional cloud storage services such as Google Music and Dropbox, which also transmit copyrighted content to consumers. A legal scholar whose work was heavily cited by Justice Antonin Scalia's dissenting opinion told me in 2014 that the case will have cloud storage and consumer electronics companies "looking over their shoulders."
"The court is sending a very clear signal that you can't design a system to be the functional equivalent of cable," said James Grimmelmann, a legal scholar at the University of Maryland. "The court also emphasizes very strongly that cloud services are different. But when asked how, it says, 'They're just different, trust us.'"
The problem, Grimmelmann argued, is that "trust us" isn't going to be very reassuring for entrepreneurs and investors building the next generation of media technologies. Silicon Valley needs clear rules about what's legal and what isn't. The Supreme Court didn't just fail to provide such clarity, it blew up the "volitional conduct" rule from Cablevision, the legal ruling that has served as the foundation for the cloud storage economy since 2008.
If you upload a pirated movie to your Dropbox account or fill your Google Music account with pirated music, you might be guilty of copyright infringement. But under the Cablevision decision Dropbox and Google don't have to worry. It's probably not a coincidence that cloud music services blossomed a couple of years after the Cablevision decision.
Now, Grimmelmann said in 2014, "the reasoning of Cablevision is dead." Aereo built its legal case on Cablevision, arguing that the user, not Aereo, controls which programs to view. Yet the Cablevision case is barely mentioned in the Supreme Court's majority opinion. Instead, the court adopted what Grimmelmann calls the "if it walks like a cable system and quacks like a cable system" standard to find Aereo liable. The court ruled that because Aereo looks a lot like a traditional cable television service, the company needs to pay the same licensing fees that traditional cable TV providers pay.
The problem is that the court never provides clear criteria for this "looks-like-cable-TV" rule. As Justice Scalia puts it in his dissent, "it will take years, perhaps decades, to determine which automated systems now in existence are governed by the traditional volitional-conduct test and which get the Aereo treatment. (And automated systems now in contemplation will have to take their chances.)"
In the process of ruling against Aereo, the Supreme Court created a mess that will take lower courts years to clean up. Online services that are similar to Aereo in some respects and different in others are more likely to face lawsuits, and the lower courts will have to sort out which services are similar enough to Aereo to face copyright liability.
The Supreme Court said its ruling shouldn't dramatically change the legal status of other technologies. "We have not considered whether the public performance right is infringed when the user of a service pays primarily for something other than the transmission of copyrighted works, such as the remote storage of content," the court said, concluding that those issues should be dealt with in future cases.
But it could take years of litigation — and millions of dollars in legal fees — to figure out exactly how the decision will affect cloud storage services.