Realnetworks, Inc. et al v. DVD Copy Control Association, Inc. et al

Filing 323

ANSWER TO COUNTERCLAIM 96 Answer to Complaint, Counterclaim,, REALNETWORKS' ANSWER AND COUNTERCLAIMS TO THE COUNTERCLAIMS OF DVD COPY CONTROL ASSOCIATION, INC., COUNTERCLAIM against DVD Copy Control Association, Inc. byRealnetworks, Inc., Realnetworks Home Entertainment, Inc.. (Cunningham, Leo) (Filed on 5/13/2009)

Realnetworks, Inc. et al v. DVD Copy Control Association, Inc. et al

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JAMES A. DiBOISE, State Bar No. 83296 Email: [e-mail] LEO CUNNINGHAM, State Bar No. 121605 Email: [e-mail] COLLEEN BAL, State Bar No. 167637 Email: [e-mail] MICHAEL A. BERTA, State Bar No. 194650 Email: [e-mail] TRACY TOSH LANE, State Bar No. 184666 Email: [e-mail] WILSON SONSINI GOODRICH & ROSATI Professional Corporation One Market Street Spear Tower, Suite 3300 San Francisco, CA 94105 Attorneys for Plaintiffs and Counterclaim Defendants REALNETWORKS, INC. and REALNETWORKS HOME ENTERTAINMENT, INC (additional counsel listed on following page) UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA REALNETWORKS, INC., a Washington Corporation; and REALNETWORKS HOME ENTERTAINMENT, INC., a Delaware corporation, Plaintiffs, v. DVD COPY CONTROL ASSOCIATION, INC., a Delaware nonprofit corporation, DISNEY ENTERPRISES, INC., a Delaware corporation; PARAMOUNT PICTURES CORP., a Delaware corporation; SONY PICTURES ENTER., INC., a Delaware corporation; TWENTIETH CENTURY FOX FILM CORP., a Delaware corporation; NBC UNIVERSAL, INC., a Delaware corporation; WARNER BROS. ENTER. INC., a Delaware corporation; and VIACOM, Inc., a Delaware Corporation, Defendants. AND RELATED CASES Case Nos. C08 04548 MHP; C08 04719 MHP PLAINTIFFS AND COUNTERCLAIM DEFENDANTS REALNETWORKS, INC. AND REALNETWORKS HOME ENTERTAINMENT, INC.'S ANSWER AND COUNTERCLAIMS TO THE COUNTERCLAIMS OF THE DVD COPY CONTROL ASSOCIATION, INC. Before: Hon. Marilyn Hall Patel Dept.: 15

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DONALD E. SCOTT, (Admitted Pro Hac Vice) Email: [e-mail] MARK S. OUWELEEN, (Admitted Pro Hac Vice) Email: [e-mail] KARMA M. GIULIANELLI, State Bar No. 184175 Email: [e-mail] BARTLIT BECK HERMAN PALENCHAR & SCOTT LLP 1899 Wynkoop Street, 8th Floor Denver, CO 80202

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Plaintiffs and Counterclaim Defendants RealNetworks, Inc. and RealNetworks Home Entertainment, Inc. (collectively "RealNetworks") hereby answer the Counterclaims (the "Counterclaims") filed by Defendant and Counterclaim Plaintiff the DVD Copy Control Association, Inc. ("DVD CCA") on January 12, 2009, and assert additional counterclaims against the DVD CCA, as follows: ANSWER TO COUNTERCLAIMS NATURE OF THE ACTION 1. RealNetworks admits that the action is for injunctive relief and damages but

denies the remainder of the allegations in Paragraph 1. JURISDICTION AND VENUE 2. RealNetworks admits that this Court has subject matter jurisdiction over the

asserted Counterclaims, and that venue in this Court is proper. THE PARTIES 3. RealNetworks admits that the DVD CCA is the licensor of the Content Scramble

System ("CSS"), but denies the DVD CCA's characterization of the nature and purpose of CSS. RealNetworks does not have knowledge or information sufficient to form a belief for the remainder of the allegations in Paragraph 3 and denies those allegations on that basis. 4. RealNetworks admits the allegations in Paragraph 4. THE CSS TECHNOLOGY AND LICENSE 5. RealNetworks admits that DVDs are 5-inch discs that are capable of storing

digital data, including audio and visual data such as a motion picture. RealNetworks admits that DVDs using CSS should be playable on CSS-licensed devices, but denies DVDs are "licensed for playback." RealNetworks does not have knowledge or information sufficient to form a belief for the remainder of the allegations in Paragraph 5, and denies those allegations on that basis. 6. RealNetworks does not have knowledge or information sufficient to form a belief

as to the allegations in the first sentence of Paragraph 6, and denies the allegations on that basis. RealNetworks admits that CSS-encrypted DVDs should be playable on CSS-licensed devices that follow prescribed "implementation rules," including rules for decryption and descrambling,
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but denies the remainder of the allegation in the second and fourth sentences of Paragraph 6. RealNetworks does not have knowledge or information sufficient to form a belief as to the allegation that CSS is a "two-part system," and denies the allegation on that basis. RealNetworks admits that CSS can be licensed and used to encrypt DVD content, and that device manufacturers must license CSS to manufacture devices capable of accessing that encrypted content. RealNetworks denies the remainder of the allegations in Paragraph 6. 7. RealNetworks does not have knowledge or information sufficient to form a belief

as to the allegations in the first sentence of Paragraph 7, and denies the allegations on that basis. RealNetworks admits that digital data can be copied on a bit-by-bit basis. RealNetworks does not have knowledge or information sufficient to form a belief as to the remainder of the allegations in the second sentence, and denies them on that basis. RealNetworks does not have knowledge or information sufficient to form a belief as to the allegations in the third sentence, and denies them on that basis. RealNetworks denies the allegations in the fourth sentence, and in particular the notion that CSS "prevents" any form of digital piracy, including Internet piracy via peer-to-peer networks, the manufacture and sale of illegitimate DVDs, or more localized sharing and exchange of unprotected DVD content. RealNetworks does not have knowledge or information sufficient to form a belief as to the allegations in the last sentence, and denies them on that basis. 8. RealNetworks does not have knowledge or information sufficient to form a belief

as to the allegations in the first sentence of Paragraph 8, and denies them on that basis. RealNetworks admits that there is an authentication component of the CSS technical specifications, but denies the remainder of the allegations in Paragraph 8. 9. RealNetworks admits that it entered into a written license agreement with the

DVD CCA on or about August 13, 2007 (the "CSS License"), and that the CSS License establishes the terms and conditions under which RealNetworks may use CSS. RealNetworks further admits that after executing the CSS License, the DVD CCA transmitted to RealNetworks certain technical specifications, including the "CSS General Specifications," "DVD Video Descrambler," "Authenticator Module for CSS Decryption Module," and "Authenticator Module
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for DVD Drive" (collectively, the "Technical Specifications"). RealNetworks admits that Section 4.2.1 of the CSS License states that licensees "shall comply with the CSS Specifications," and that the term "Agreement," as used in the CSS License, purports to refer collectively to unnamed "technical specifications" and the CSS License itself. RealNetworks denies the remainder of the allegations of Paragraph 9, and in particular denies all allegations suggesting that the Technical Specifications are part of the CSS License as constituting legal conclusions for which an answer is neither required nor appropriate. 10. RealNetworks denies the allegations in the first sentence of Paragraph 10.

RealNetworks admits that the CSS License imposes on it an obligation to implement certain technical measures, but denies the remainder of the allegations in Paragraph 10, including the allegation that either the CSS License or the Technical Specifications contains a disc-in-tray requirement. REALNETWORKS' ALLEGED BREACH OF THE LICENSE AGREEMENT 1 11. RealNetworks admits that DVD CCA has authorized it to manufacture DVD-

Video Descramblers ("Descramblers"), Authenticator Modules for CSS Encryption Modules, and Authenticator Modules for DVD Drives ("Authenticators") in accordance with the corresponding technical specifications for those modules. RealNetworks also admits that it selected membership categories prior to executing the CSS License. RealNetworks does not have knowledge or information sufficient to form a belief as to the allegations in the last sentence of Paragraph 11, and denies them on that basis. RealNetworks denies the remainder of the allegations in Paragraph 11, including any suggestion that the Technical Specifications are part of the CSS License and that RealNetworks is not licensed to develop and manufacture certain products as constituting legal conclusions for which an answer is neither required nor appropriate.

The headings in this Answer reflect the corresponding headings in the Counterclaims. This has been done for purposes of clarity and organization. None of the headings in RealNetworks' Answer should be construed as admissions of any kind.
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12.

RealNetworks admits that it developed a software application that was released as

"RealDVD," and admits that this software runs on a Windows PCs and is capable of making a secure, fair-use copy of the contents of a motion picture DVD to a hard drive for later playback without the DVD present. RealNetworks also admits that it is developing a product known internally as Facet that has similar functionality, which runs on standalone, single-purpose hardware rather than on a PC. RealNetworks denies the remainder of the allegations in Paragraph 12, including the suggestion that Facet is a personal computer. 13. RealNetworks admits that it is a large public company with highly skilled

employees. RealNetworks also admits that it received legal advice from its attorneys in connection with RealDVD and Facet. RealNetworks denies the remainder of the allegations in Paragraph 13. 14. RealNetworks admits that one of the options presented to a Facet or RealDVD

user upon the insertion of a DVD is to save the contents of the DVD, but denies the remainder of the allegations in the first sentence of Paragraph 14, including the suggestion that only one option is presented to users upon the insertion of a disc. RealNetworks admits the allegations in the second sentence. RealNetworks admits that one of the value propositions of RealDVD and Facet is that both products allow users to organize motion picture content that has been saved to a hard drive, but denies the remainder of the allegations in Paragraph 14, including the suggestions that the Company has not taken steps to stop improper use of its products, and that movies saved by RealDVD and Facet can be "distribut[ed]" or "access[ed]" by "other users." 15. Paragraph 15 contains allegations that constitute legal conclusions for which an

answer is neither required nor appropriate, and RealNetworks denies them on that basis. To the extent the allegations in Paragraph 15 require a response, RealNetworks denies the allegations. 16. Paragraph 16 contains allegations that constitute legal conclusions for which an

answer is neither required nor appropriate, and RealNetworks denies them on that basis. To the extent the allegations in Paragraph 16 require a response, RealNetworks denies the allegations. 17. RealNetworks admits that RealDVD and Facet are designed to allow, and that

RealDVD has been marketed as allowing, consumers to make a secure, fair-use copy of DVD
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content that the consumer owns. RealNetworks also admits that neither RealDVD nor Facet is capable of monitoring or preventing improper user behavior because the defendant movie studios have refused to implement simple technical measures necessary to do so, including serialization or watermarking of DVDs. RealNetworks denies the remainder of the allegations in Paragraph 17. 18. Paragraph 18 contains allegations that constitute legal conclusions for which an

answer is neither required nor appropriate, and RealNetworks denies them on that basis. To the extent the allegations in Paragraph 18 requires a response, RealNetworks denies the allegations. 19. RealNetworks does not have knowledge or information sufficient to form a belief

as to the allegations in Paragraph 19, and denies the allegations on that basis. FIRST CLAIM FOR RELIEF (Breach of Contract) 20. RealNetworks incorporates by reference its responses to Paragraphs 1 through 19,

inclusive, as though fully set forth herein. 21. Paragraph 21 contains allegations that constitute legal conclusions for which an

answer is neither required nor appropriate, and RealNetworks denies them on that basis. To the extent the allegations in Paragraph 21 requires a response, RealNetworks denies the allegations. 22. Paragraph 22 contains allegations that constitute legal conclusions for which an

answer is neither required nor appropriate, and RealNetworks denies them on that basis. To the extent the allegations in Paragraph 22 requires a response, RealNetworks denies the allegations. 23. Paragraph 23 contains allegations that constitute legal conclusions for which an

answer is neither required nor appropriate, and RealNetworks denies them on that basis. To the extent the allegations in Paragraph 23 requires a response, RealNetworks denies the allegations. 24. Paragraph 24 contains allegations that constitute legal conclusions for which an

answer is neither required nor appropriate, and RealNetworks denies them on that basis. To the extent the allegations in Paragraph 24 requires a response, RealNetworks denies the allegations.

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SECOND CLAIM FOR RELIEF (Breach of the Implied Covenant of Good Faith and Fair Dealing) RealNetworks incorporates by reference its responses to Paragraphs 1 through 24,

inclusive, as though fully set forth herein. 26. RealNetworks denies the allegations in the first two sentences of Paragraph 26.

RealNetworks admits that both RealDVD and Facet have been designed to allow consumers to make a secure, fair-use copy of motion picture content stored on a DVD to a hard drive for later playback. RealNetworks further admits that it had no communications with the DVD CCA about the functionality of RealDVD or Facet prior to entering into the CSS License, but denies the remainder of the allegations in Paragraph 26. 27. Paragraph 27 contains allegations that constitute legal conclusions for which an

answer is neither required nor appropriate, and RealNetworks denies them on that basis. To the extent the allegations in Paragraph 27 requires a response, RealNetworks denies the allegations. 28. Paragraph 28 contains allegations that constitute legal conclusions for which an

answer is neither required nor appropriate, and RealNetworks denies them on that basis. To the extent the allegations in Paragraph 28 requires a response, RealNetworks denies the allegations. AFFIRMATIVE AND OTHER DEFENSES RealNetworks asserts the following affirmative and other defenses. In asserting these defenses, RealNetworks does not assume the burden of proof with respect to any issue as to which applicable law places the burden of proof upon the DVD CCA. RealNetworks alleges and states the following upon information and belief except with respect to its own actions: FIRST AFFIRMATIVE DEFENSE (Unconscionability ­ All Causes of Action) As and for an affirmative defense to all Causes of Action, RealNetworks alleges, without admitting that the DVD CCA was injured or damaged in any manner or amount whatsoever, that Counterclaim Plaintiff is barred from any and all recovery or relief regarding the CSS License Agreement or regarding any claim of circumvention, because any obligation by RealNetworks under the CSS License Agreement, to the extent that such obligation has not been performed or
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excused, is unconscionable and unenforceable. The DVD CCA seeks to bind RealNetworks to hidden and secret contractual terms which were neither known nor readily available to RealNetworks prior to execution of the CSS License Agreement. For example, RealNetworks was prohibited access to the Technical Specifications prior to execution of the CSS License Agreement, which Technical Specifications the DVD CCA seeks to incorporate into the Agreement. Further, there was no opportunity for RealNetworks to negotiate the terms of the CSS License Agreement, which was presented to RealNetworks on a take-it-or-leave-it basis, and which the DVD CCA now claims contain restrictions that were expressly rejected as proposed amendments to the CSS License Agreement. SECOND AFFIRMATIVE DEFENSE (Contract of Adhesion ­ All Causes of Action) As and for an affirmative defense to all Causes of Action, RealNetworks alleges, without admitting that the DVD CCA was injured or damaged in any manner or amount whatsoever, that the DVD CCA is barred from any and all recovery or relief regarding the CSS License Agreement, because the CSS License Agreement is a contract of adhesion. There was no opportunity for RealNetworks to negotiate the terms of the CSS License Agreement, which was presented to RealNetworks on a take-it-or-leave-it basis. Further, the DVD CCA seeks to incorporate hidden and secret contractual terms which were neither known nor readily available to RealNetworks prior to execution of the CSS License Agreement, and which were not subject to negotiation by RealNetworks. THIRD AFFIRMATIVE DEFENSE (Estoppel ­ All Causes of Action) As and for an affirmative defense to all Causes of Action, RealNetworks alleges, without admitting that the DVD CCA was injured or damaged in any manner or amount whatsoever, that the DVD CCA's claims are barred in whole or in part by the doctrine of estoppel. The DVD CCA seeks to impair the fair-use rights of consumers to make a back-up copy of DVDs that they own. The DVD CCA's filing and maintenance of the present lawsuit seeks to improperly restrain the fair-use rights of consumers, whose fair-use rights extend to technologies that aid in
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the exercise of fair use. In addition, the DVD CCA is estopped from pursuing all Causes of Action or any equitable relief against RealNetworks because of the DVD CCA's actions and omissions with respect to Kaleidescape and with respect to proposed amendments to the CSS License Agreement, upon which RealNetworks reasonably relied to its detriment. The DVD CCA is also estopped from pursuing all Causes of Action against RealNetworks because of the ruling in DVD Copy Control Association, Inc. v. Kaleidescape, Inc., Santa Clara Court Case No. 1-04-CV031829 and because the DVD CCA had the opportunity but failed to amend the CSS License Agreement with restrictions relevant to the DVD CCA's claims here. Further, the DVD CCA is estopped from pursuing all Causes of Action because it has not pursued claims against AMX Corporation or Telestream, Inc., each of which, upon information and belief, is a CSS licensee that sells and markets products that save CSS-encrypted DVD content to hard drives. FOURTH AFFIRMATIVE DEFENSE (Unclean Hands ­ All Causes of Action) As and for an affirmative defense to all Causes of Action, RealNetworks alleges, without admitting that the DVD CCA was injured or damaged in any manner or amount whatsoever, that the DVD CCA's claims are barred in whole or in part by the doctrine of unclean hands. The DVD CCA seeks to impair the fair-use rights of consumers to make a back-up copy of DVDs that they own. FIFTH AFFIRMATIVE DEFENSE (Laches ­ All Causes of Action) As and for an affirmative defense to all Causes of Action, RealNetworks alleges, without admitting that the DVD CCA was injured or damaged in any manner or amount whatsoever, that The DVD CCA's claims are barred in whole or in part by the doctrine of laches. The DVD CCA is barred from pursuing all Causes of Action because it has not pursued similar claims against AMX Corporation or Telestream, Inc., each of which, upon information and belief, is a CSS licensee that sells and markets products that save CSS-encrypted DVD content to hard drives.

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ADDITIONAL DEFENSES RealNetworks reserves the right to assert additional affirmative defenses once the precise nature of the relevant circumstances or events is determined through subsequent discovery. COUNTERCLAIMS Declaratory judgment plaintiffs/counterclaim defendants RealNetworks, Inc. and RealNetworks Home Entertainment, Inc. (together, "RealNetworks") bring these counterclaims against the DVD Copy Control Association ("DVD CCA") as follows: INTRODUCTION The DVD CCA and its co-conspiring members, Disney Enterprises, Inc.,

Paramount Pictures Corp., Sony Pictures Entertainment, Inc., Twentieth Century Fox Film Corp., NBC Universal, Inc., Warner Brothers Entertainment, Inc. and Viacom, Inc. (together, the "Studios"), 2 have sought to enjoin RealNetworks from distributing a product that provides the technology to add features to DVD content by saving the content to a personal hard drive. RealNetworks' technology products compete with products offered by the Studios. The position of the DVD CCA and Studios about the CSS License Agreement was confirmed during the hearing on the preliminary injunction motion. They acknowledge that the CSS License Agreement results from collective action by the Studios through the DVD CCA to prohibit all copying to a hard drive unless the Studios jointly authorize the making of such a copy. Pursuant to their interpretation of the CSS License Agreement, each Studio has ceded its individual authority to authorize the use of its movie content through individual copyright licenses in favor of a joint agreement to grant or withhold the use of such content­ the CSS License Agreement. 2. If true, this is an antitrust violation for two reasons: (1) As described below,

because of their interpretation of the CSS License Agreement, no individual Studio can authorize

As a result of the procedural posture of this case, the claims that Real alleges in this Answer and Counterclaim are against the DVD CCA only. Since the factual allegations of these claims involve the activity of the DVD CCA's member Studios, Real identifies the Studios as coconspirators here and maintains all of the factual allegations that it has relating to the Studios in this counterclaim. Real has simultaneously filed a motion for leave to amend its First Amended Complaint against the Studios and DVD CCA.
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the use of its own content consistent with the claimed provisions of the CSS Agreement; (2) the CSS Agreement is being used to extend a legally granted monopoly over content into separate markets ­ to prevent competition from technologies that would allow a copy of content for fair use purposes. But the making of a copy of a Studio DVD is authorized fair use under the Copyright Act, so the Studios have no "authority" to grant or withhold with respect to that content. Nevertheless, the DVD CCA and Studios claim that the CSS Agreement grants the Studios such authority, and that anyone seeking to compete with them in that separate market violates not only the CSS Agreement, but is also subject to criminal penalties under the Digital Millennium Copyright Act ("DMCA"). 3. The average consumer owns over 75 DVDs. DVDs cost approximately $10 -

$15. Thus the average household may have an investment of well over $1,000 in its DVD collection. 4. Market research shows that consumers' main complaints about DVDs are

twofold: (1) they get damaged; and (2) they get lost. It is common to open the DVD case of a favorite video only to find an empty slot; the wrong DVD in the case; or a DVD covered with scratches or gunk. 5. In 2007, RealNetworks sought to meet strong consumer demand among DVD

owners for technology that would enable them to save a secure copy of their DVDs to a hard drive for safekeeping, portability, easy retrieval, and later playback. It developed two innovative products ­ a software product code-named "Vegas" and a device code-named "Facet." Both products will be referred to herein as "RealDVD." RealDVD allows users to save and play a secure backup copy of the DVDs they own and to organize their favorite movies, TV shows, scenes and actors so that they are all just a click away. 6. There were good reasons the Studios should have been excited about RealDVD:

products that make DVDs easier for consumers to use make DVDs more valuable to their owners, and so are likely to increase the number of DVDs that consumers want to buy. RealNetworks' innovative products thus stood to benefit everyone: consumers, who would get

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more value out of the DVDs they own; the Studios, who would sell more DVDs; and RealNetworks, from the sale of its new products. 7. Before RealNetworks released Vegas, RealNetworks approached the Studios to

notify them of the product, and to explore mutual marketing opportunities. RealNetworks answered detailed questions about its product and the extensive safeguards it provided against piracy. Negotiations ensued with two of the Studios, Fox and Paramount. 8. Underlying the negotiations between RealNetworks and the Studios was the

question of whether a consumer who had purchased a DVD had a fair-use right to make a secure copy of the DVD on his computer hard drive. RealNetworks believed then, as it does now, that a consumer who has purchased, for example, an Iron Man DVD, does not need further permission from Paramount to copy that DVD onto her hard drive so as to get the benefit of additional features that can only be provided by the saving to a hard drive. Those features include the protection of DVD content, the ability to automatically organize and search DVD content, bookmarking and parental control features, and the benefits of efficient portability for an individual's DVD collection. Nonetheless, RealNetworks was eager to negotiate these issues with the Studios, in the expectation it would be possible to reach marketing agreements that would benefit all of the parties. 9. Ultimately RealNetworks was unable to conclude a deal with any of the Studios.

The Studios recognized that consumers would value the DVD playback and storage capability. The Studios, however, wanted their customers to pay substantial sums to the Studios themselves for this functionality. In essence, the Studios wanted to charge consumers who have already purchased the DVDs for their exercise of their fair-use rights to make a backup copy. 10. Any individual Studio could have decided not to enter into an agreement with

RealNetworks and to sue to prevent its customers from using RealDVD to make copies of that Studio's titles. Doing so individually, however, risked the possibility that another Studio might reach an agreement with RealNetworks to promote its titles in connection with the release of a popular new product. The litigating Studio then would face what could be a legal and public relations nightmare.
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11.

The Studios agreed that they would claim that they cannot enter into individual

agreements with RealNetworks ­ in other words, they agreed collectively not to deal with RealNetworks. So, for example, they claim that, because of the CSS Agreement, Paramount cannot grant a license to make an archival copy of its own Iron Man DVD without the permission of Fox, Disney, and the rest. This is a horizontal group boycott, and it is a horizontal group boycott even though the Studios in fact have no right to grant or withhold authority to make fair use copies and RealNetworks does not need their consent. 12. According to the Studios, this boycott is required by the terms of a license issued

through an entity that they dominate called the DVD CCA. The DVD CCA was purportedly created to license the encryption technology (CSS) that any company needs in order to make products to play a DVD. According to the Studios, under the CSS license, unless amended (which requires their collective approval through DVD CCA), they are prevented from individually granting RealNetworks a license that would make clear that customers of any particular Studio can make an archival copy of that Studio's DVDs (as long as the customer owns the DVD). 13. Testimony at the preliminary injunction hearing confirmed that the Studios

entered into this collective agreement that, according to their interpretation, prohibits any individual studio, without the action of the group, from authorizing any copies of their content (for fair use or otherwise). Ms. King, a former Studio lawyer characterized by the Studios' outside counsel as "a framer" of the CSS license (Tr. 19:9-17), unequivocally testified that the motion picture studios got together as a group to determine the terms of the CSS license. (Tr. 74:1-12; 76:14-19; 83:14-84:6; 110:19-111:10). Their concerted action is illegal because they agreed that there would be "no copies at all" of each individual Studio's content made without the authority of the group acting in concert. According to Ms. King, this agreement is memorialized in the CSS License Agreement. (Tr. 74:1-12; 79:22-80:3). According to Ms. King, the right of the Studios to authorize the use of their content flows through the CSS License Agreement, which allows only what the Studios "authorized could be done." (Tr. 87:16-88:4; 98:10-23; 111:22-112:5).
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14.

Testimony from the expert from the DVD CCA, Dr. Kelly, further confirmed that

the Studios and the DVD CCA intend the CSS agreement to prohibit any copies of DVD content to a hard drive without the authority of the Studios. (Tr. 152:20-153:8). Dr. Kelly's theory is that the CSS agreement, by its terms, requires that a physical DVD disc be in a drive during playback. (Tr. 149:10-23). According to this interpretation, no individual studio could possibly give authority to create a product allowing for the copying of the individual studios' content without having that product run afoul of the group CSS Agreement. In other words, in order for an individual studio to grant such authority, the group acting as a whole through the DVD CCA would need to amend their agreement. The CSS Agreement, which is a product of the joint conduct of the DVD CCA and the Studios, therefore memorializes the illegal horizontal agreement to boycott any potential competitor. 15. Consistent with their agreement, the Studios have never authorized anyone to

make a playable copy of their content. (Tr. 100:14-20). Mr. Dunn, speaking for 20th Century Fox Entertainment, confirmed the same thing: "The Studios have never licensed any third party to offer a lawful product that would allow the copying of DVDs onto hard drives (and to my understanding, the encryption technology we use on our DVDs does not even permit for such a license)." (Dunn Decl., ¶ 28.) 16. Consumers are directly harmed by the Studios' and the DVD CCA's conduct.

The risk the Studios faced ­ that some one of them would do a deal with RealNetworks or any other of their potential competitors ­ is the risk created by a competitive marketplace. Consumers would have obtained a new technology to gain more value from their DVDs, without having to pay again for a backup copy of the DVDs they had already purchased. The Studios decided to short-circuit this outcome so that they could appropriate all of the extra value themselves, through the means of a group boycott. The DVD CCA was the instrumentality that they used to effectuate the boycott. A group boycott is, indeed, a very effective means of achieving this objective. Not coincidentally, that is also why it is per se illegal under the antitrust laws.

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NATURE OF THE CASE The RealDVD Products The RealDVD products give consumers the ability to save DVDs they own to

their computers or, in the case of Facet, a separate hardware box, where the DVDs are catalogued in a library that displays covers of the DVDs so that they are easily retrievable for playback. A user's screen in the Vegas product will look like this:

Once the DVDs are stored in RealDVD, they can be retrieved for playback at the

user's convenience, without having to search for the physical copy of the DVD. 19. RealDVD offers many features that consumers want, including: · The ability to keep consumers' DVDs safe, without scratches, gunk, skips, blips, or lost titles. Through the Vegas product, the ability to take an owner's DVD collection on the road to view from a hard drive. Many consumers watch the DVDs they own from their personal computer on airplanes and during vacations, but do not want to carry along multiple DVDs from their collection. -14-

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· ·

RealDVD remembers where the consumer is in the movie, so he can stop, shut down and come back later without losing his spot. RealDVD provides additional features, such as detailed plot synopses and cast lists for the movies; parental controls; and the ability to browse the collection by cover art, genre, title, rating, or actor.

The product designers at RealNetworks saw the potential demand for products

like RealDVD based partly on the popularity of a product from a company named Kaleidescape. As described on the Kaleidescape website, "The Kaleidescape System simplifies the way you collect, manage and enjoy movies and music. Once your personal entertainment collection is stored on the Kaleidescape System's fault-tolerant Servers, you can say goodbye to DVD and CD clutter and the frustration of storing and organizing your movies and music." 21. With a price tag that can reach over $10,000, however, Kaleidescape is not

accessible to the general public. Kaleidescape makes the point quite well: "the Kaleidescape System, is an entertainment server that has changed the way movies and music are collected and enjoyed in a home, yacht or private jet." See http://www.kaleidescape.com/news/. 22. The DVD CCA sued Kaleidescape on the ground that Kaleidescape was barred by

the terms of its license agreement to DVD encryption technology (the CSS license) to provide consumers with technology that would allow them to make personal copies of the DVDs they own. 23. The DVD CCA lost that case. Thereafter, RealNetworks determined that it could

make products that provided this capability while complying with the CSS agreement and the law. 24. RealNetworks wanted to make a product with similar functionality that could be

used by the average DVD customer. The price tag for the Vegas software, for example, is $50.00 (and was offered at an introductory price of $29.99). B. 25. The Studios Seek to Maintain the Profits from the Fair Use Copy The Studios themselves have been attempting to develop a product that would

allow consumers to make a copy of the DVDs they purchase for use on a personal computer or portable video player like an iPod. The Studios call this "digital copy", "managed copy," and
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"second session copy." "Digital copy" is a separate disc that allows for the making of a copy of the content on a DVD onto a consumer's computer hard drive. The copy may be made directly from a DVD or could be delivered over the Internet as a download. Upon information and belief, one or more of the Studios have approached a company called Sonic to help them build a product with functionality similar to RealDVD. 26. The critical difference between RealDVD and the Studios' plan for "digital" and

"managed copy" is that the Studios intend to charge DVD purchasers an additional sum for the "managed copy" of each and every DVD they have purchased. Having already purchased the digital content on their DVDs, however, DVD owners have the fair-use right to make a backup copy for these purposes without buying the content a second time. In fact, average consumers have over 75 DVDs that they have already purchased and for which they already own the rights to make a fair use copy without making an additional payment to the Studios. The Studios are motivated by their own financial gain. Indeed, the longer that they are able to hinder the development and release of products that provide consumers with the ability to make fair-use copies of DVDs that they own, the Studios' own ability to market a competing product is aided. The illegal scheme thus delays competitors while leaving the Studios free to market their own products and to charge consumers for the fair-use copy that the law already gives consumers the right to make. 27. Consumers are harmed by this conduct. To start, charging consumers to exercise

their fair-use rights, as the Studios would like to do, reduces the value of the DVDs consumers already own or would buy and improperly extends the narrow exclusivity that the copyright laws provide to a content owner (here, the Studios). The effect is the same as if the Studios had agreed to increase the prices of the DVDs themselves. RealNetworks' products threaten the Studios' attempts to monetize the non-infringing digital copies consumers already are entitled to create. 28. But whether or not a consumer has a fair-use right to make backup copies of the

DVDs they already have purchased, the Studios' collective agreement not to negotiate individual licenses for their content with RealNetworks or any other potential competitor is nothing more
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than an illegal scheme between horizontal competitors to eliminate a competitive threat and to charge higher prices. The harm to consumers from such a scheme is obvious--they will pay higher prices for the privilege of making digital copies of their DVDs. 29. The Studios' and the DVD CCA's unlawful conduct ensures that ­ until they are

stopped by a court ­ the Studios will be free from competition in the market for technology that enables a consumer to make a secure backup copy of a DVD that she already owns. Competition and consumers alike will suffer as a result of this unlawful conduct. C. 30. RealDVD's Protection Against Unauthorized Copying RealNetworks has put into place significant protections against unauthorized

copying, including: · · RealDVD stores DVD content securely on a hard drive in the original CSS encrypted form. RealDVD adds a layer of security to the CSS protection by further encrypting the CSS encrypted content and the keys to unlock the content with AES encryption. AES encryption is a quintillion times more secure than the CSS encryption. It is the encryption system used by the U.S. Government for classified information. RealDVD is a "closed system" that does not allow DVD content to be sent through a network or uploaded to an Internet site and viewed by any other person. The backup copy made by RealDVD cannot be copied in playable form to any other hard drive or other device as a result of the AES encryption. The backup copy made by RealDVD cannot be played from any storage device other than the storage device onto which it was originally copied. It is impossible to transfer playable DVD content onto a device like an iPod or to "burn" a new playable DVD disc using RealDVD. RealDVD cannot be used to create pirate or counterfeit DVDs. When Facet saves a DVD to its hard drive, that DVD is locked to that hard drive and may only be played on the Facet machine that saved the copy. Facet does not allow a user to do anything with the saved DVD other than play it. It cannot be sent over the Internet or even over a home network. Vegas prevents making a copy of the DVDs that are on the computer hard drive. A user can make a copy only from the physical DVD. The user cannot then make a playable copy of the copy. Vegas allows the playback of the saved DVD on only five registered playback devices. The intended and probable use is for sharing of a single archival -17-

·

·

· · ·

·

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hard drive among a family's multiple computers. The playback is accomplished by taking the single physical hard drive on which the DVDs are saved and plugging it in one at a time into one of five registered devices. In order to play the DVDs, the hard drive needs to be present. Thus with the removable hard drive, a family can view their saved DVDs on television (so long as it is attached to hard drive on which the saved DVDs are located); a laptop in the bedroom if the television is being used by other members of the family; a laptop during travel; or a personal computer located, for example, in the kitchen. The Studios' and the DVD CCA's Use of the CSS License Agreement to Prevent Competition Defendant DVD CCA is a joint venture trade association. Its member movie

Studios compete against one another and others in the industry to provide content to users in various formats. As a joint venture of horizontal competitors, the DVD CCA must have circumscribed powers necessary to achieving a lawful purpose. 32. The stated purpose of the DVD CCA is to license the Content Scramble System

(CSS) to manufacturers of DVD hardware, discs and related products. As described by Defendant DVD CCA, "CSS prevents movies from being illegally duplicated, protecting the intellectual property of the manufacturers, producers and writers from theft." (Emphasis added). Indeed, the DVD CCA has represented to the United States government in connection with its application under the National Cooperative Research and Production Act (NCRPA) that "[t]he nature and objectives of the venture are to provide an encryption technology designed to prevent unlawful or unauthorized copying by encrypting digital files that can be decrypted only on licensed equipment. DVD CCA also intends to research, evaluate, adopt and license related technologies designed to protect CSS against unauthorized or unlawful copying and to prevent the unauthorized or unlawful copying and playback of DVD discs." (Fed. Reg. Vol. 66, No. 150, at 40729 (8/3/2001).) 33. The DVD owner's ability to save his/her own DVDs for storage and later

playback, however, is neither illegal duplication nor theft, but the exercise of his/her legitimate fair-use rights with respect to a product already purchased.

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34.

Whether or not the DVD owner already has this fair-use right, a Studio Defendant

could license the ability to make such copies. Achieving any limited legitimate purpose of the DVD CCA does not require a licensing agreement that prohibits individual Studios from granting licenses to copy their content from DVDs. Yet this is exactly what the DVD CCA and the Studios claim that the CSS License prohibits. As such, the legitimate purpose of the DVD CCA has been subverted to serve as a means through which the Studios act as, and enforce, a cartel with respect to the licensing of their content by different, lawful copying technologies. 35. Indeed, the CSS License specifically contemplates with respect to "secure

managed recording" (essentially, burn-to-DVD), another type of copying technology, that collective action is not required for a license to a given Studio's content (assuming such a license is necessary at all). The Studios' approach to "secure managed recording" illustrates that the terms under which a particular movie or television program can be licensed for the creation of a digital copy is (at most) a matter for negotiation with the individual Studio. 36. Nonetheless, the DVD CCA and the Studios claim that the CSS Agreement

prevents the Studios from entering into individual licenses granting the right to make digital copies of DVDs previously purchased by customers. To try to enforce the illegal and unjustified terms in the CSS License Agreement, they demand that in order to license the CSS technology, RealNetworks and other potential competitors to the Studios must agree not to compete in the provision of technology that would enable DVD owners to create and store a secure digital copy of DVDs that they own. 37. If the DVD CCA and the Studios are right in their collective interpretation of the

CSS License Agreement -- that the agreement conditions access to the CSS technology on a promise not to enable DVD owners to create and store a secure copy of DVDs that they own, except upon terms collectively dictated by the Studios and the DVD CCA -- then the agreement itself is illegal and would have been illegal since its inception. It would simply function as the vehicle by which the Studios unlawfully extend the narrow monopoly afforded to them by the copyright laws.

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38.

If the Studios and the DVD CCA are wrong in their interpretation of the CSS

License, then their attempt to use the License to impose post-hoc terms that were not included in the License amounts to an illegal group boycott. 39. The Noerr Pennington doctrine does not insulate their collective agreement to

interpret the CSS License in this manner. It is not the litigation through which the Studios and the DVD CCA seek to persuade a court to adopt their interpretation of the CSS License Agreement that has the anti-competitive effect. Rather, it is the interpretation of the Agreement in the manner advocated by the Studios and the DVD CCA that causes the harm, by turning the CSS Agreement into an exclusionary agreement that requires anyone who executes it to give up the right to compete with the Studios. It is thus the CSS License Agreement itself, or the Studios' and the DVD CCA's collective interpretation of it, that violates Section 1. Litigation is merely a manifestation of their illegal agreement. E. 40. Harm to Consumers from the Illegal Cartel In making these agreements, the Studios are motivated by their own financial

gain. There are two distinct ways, both illegal, in which the Studios hope to profit from their illegal scheme. Consumers will be harmed in either event. 41. To begin with, despite the fact that their customers have a fair-use right to make

backup copies of the DVDs they already have purchased, the Studios would like to force DVD owners to pay a second time to obtain that copy. In other words, the Studios want to charge consumers to exercise their fair-use rights. If the co-conspiring Studios and the DVD CCA succeed in imposing this illegal surcharge, they will have reduced the value of the DVDs consumers already own or would buy. Consumers will get less value for the same price. 42. The Studios perceive the new products developed by RealNetworks as a

significant threat to their ability to monetize the non-infringing digital copies consumers already are entitled to create, a stream of revenue to which the Studios purport they are entitled but as to which the copyright laws, in fact, give them no right. 43. Moreover, whether or not customers have a fair-use right to make backup copies

of the DVDs they already have purchased, the Studios' collective agreement not to negotiate
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individual licenses for their content with RealNetworks, under the guise that the CSS Agreement would preclude such deals anyway, is nothing more than an illegal price fixing scheme between horizontal competitors. The harm to consumers from such a scheme is obvious--they will pay higher prices for the privilege of making digital copies of their DVDs. 44. By their illegal agreement, the co-conspiring Studios have ensured that ­ unless a

court intervenes ­ they will face no competition in the market for technology that enables a consumer to make a secure backup copy of a DVD that she already owns. With no competitors to challenge them, the Studios will face less pressure to make the technology available to consumers sooner rather than later, or to develop consumer-friendly features. Competition and consumers alike will suffer as a result of this unlawful conduct. PARTIES 45. RealNetworks, Inc. is a Washington corporation with its principal place of

business in Seattle, Washington. It is engaged in the business of, among other things, developing, manufacturing, and selling technology for the creation, delivery, playback and management of digital media. Consumers use RealNetworks' services and software to find, play, purchase and manage free and premium digital content, including music, games and video. Broadcasters, network operators, media companies and enterprises use RealNetworks' products and services to create and deliver digital media to PCs, mobile phones and other consumer electronics devices. RealNetworks' RealPlayer product is an innovative award-winning technology that was one of the first media players capable of streaming media over the Internet. 46. RealNetworks Home Entertainment, Inc. is a Delaware corporation with its

principal place of business in Seattle, Washington. It is a subsidiary of RealNetworks, and it is the entity that distributes the RealDVD product and that will distribute the Facet product. 47. The DVD CCA is a Delaware nonprofit corporation, having offices located in

Morgan Hill, California. According to the allegations of its Amended Answer and Counterclaims, the DVD CCA is responsible for developing, evaluating and licensing copy control and related technologies to participants at various levels in the DVD industry. DVD CCA is the licensor of the Content Scramble System. DVD CCA licenses the Content Scramble
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System technologies to companies that manufacture hardware and software products that play back to viewers CSS-protected DVDs, recordable discs and related products, and to motion picture studios and other companies whose audio-visual works are encrypted using the Content Scramble System. The Studios are members of the DVD CCA. Upon information and belief, the other members of the DVD CCA are consumer electronics companies and computer manufacturers. Upon information and belief, there are twelve seats on the DVD CCA's board of directors and the Studios hold six of them. The remaining seats are held by representatives of the computer electronics industries and computer companies. CO-CONSPIRING STUDIOS 48. Disney Enterprises, Inc. is a Delaware corporation with its principal place of

business in Los Angeles, California. It is engaged in the business of, among other things, making motion pictures. It is a member of the DVD CCA. 49. Paramount Pictures Corp. is a Delaware corporation with its principal place of

business in Los Angeles, California. It is engaged in the business of, among other things, making motion pictures. It is a member of the DVD CCA. 50. Sony Pictures Entertainment, Inc. is a Delaware corporation with its principal

place of business in Culver City, California. It is engaged in the business of, among other things, making motion pictures. It is a member of the DVD CCA. 51. Twentieth Century Fox Film Corp. ("Fox") is a Delaware corporation with its

principal place of business in Los Angeles, California. It is engaged in the business of, among other things, making motion pictures. It is a member of the DVD CCA. 52. NBC Universal, Inc., is a Delaware corporation with its principal place of

business in Universal City, California. It is engaged in the business of, among other things, making motion pictures. It is a member of the DVD CCA. 53. Warner Bros. Entertainment, Inc. is a Delaware corporation with its principal

place of business in Los Angeles, California. It is engaged in the business of, among other things, making motion pictures. It is a member of the DVD CCA.

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54.

Viacom, Inc. is a Delaware corporation with its principal place of business in

New York, New York. It is engaged in the business of, among other things, making motion pictures. It is a member of the DVD CCA. JURISDICTION, VENUE AND INTERSTATE COMMERCE 55. These counterclaims arise under the antitrust laws of the United States, including

Section 1 of the Sherman Act, 15 U.S.C. § 1, and Sections 4 and 16 of the Clayton Act, 15 U.S.C. §§ 16 and 26, and under the California Cartwright Act, Bus. & Prof. Code § 16700 et seq., and the California Unfair Competition Law, Bus. & Prof. Code § 17200 et seq. 56. commerce. 57. Subject matter jurisdiction is founded on 28 U.S.C. §§ 1331 and 1337(a). This The actions complained of have occurred in and substantially affected interstate

Court has jurisdiction over RealNetworks' state law claims pursuant to 28 U.S.C. § 1367. 58. Venue for these counterclaims is appropriate in this district pursuant to 28 U.S.C.

§§ 1391 and 1400(b). FACTUAL ALLEGATIONS RealNetworks' CSS License and the Introduction of the RealDVD Product 59. RealNetworks entered into a CSS License Agreement with the DVD CCA on or

about August 13, 2007, for the purpose of obtaining the technology needed for its RealDVD product to play back encrypted DVD content on personal computers. RealNetworks is therefore entitled to use the CSS technology under the terms of that Agreement. 60. In September, 2008, RealNetworks informed the DVD CCA and the Studios that

its RealDVD technology would be released to the public on September 30, 2008. After unsuccessful attempts to resolve the ensuing dispute between RealNetworks and the DVD CCA and the Studios, described above, RealNetworks sued both the DVD CCA and the Studios in this Court on September 30, 2008. RealNetworks' complaint seeks a declaration that RealNetworks has neither breached the terms of its CSS License nor engaged in conduct in violation of the DMCA. At the same time, in the Central District of California, the Studios filed their own Complaint, together with an ex parte application for a temporary restraining order and an order
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to show cause why a preliminary injunction should not issue to prevent RealNetworks from marketing or selling its RealDVD product. 61. Following transfer of the Studios' Complaint and pending TRO motion to the

Northern District of California, this Court granted the Studios' renewed request for a temporary restraining order barring the sale of RealDVD on October 7, 2008. On November 10, 2008, the DVD CCA filed Counterclaims against RealNetworks, including a claim that RealNetworks has breached the CSS License Agreement by developing and distributing RealDVD, accompanied by DVD CCA's own motion for preliminary injunction. RealNetworks moved for and was granted leave to amend its Complaint to include Facet on December 23, 2008. The DVD CCA has subsequently amended its Counterclaims to allege that RealNetworks' development of Facet also constitutes a breach of the CSS License Agreement. The Relevant Market 62. The relevant product market is the provision of technology that enables

consumers to (a) create or otherwise obtain digital copies of movies and TV shows that they own on DVDs and (b) store and manage those copies electronically (e.g., on a hard drive) for subsequent playback. Only firms that enable consumers to obtain digital copies of movies and TV shows that they own and to store them electronically for subsequent playback have the ability to take significant amounts of business away from each other. A hypothetical monopolist of such technology would be able profitably to impose a small but significant and nontransitory increase in price. Manufacturers of conventional DVD players do not compete in this market, in that they do not constrain pricing by firms in the relevant market, but they do lose sales and income to firms that succeed in the relevant market. 63. 64. The relevant geographic market is the United States. The principal competitors in the relevant market are RealNetworks, AMX,

Telestream, Kaleidescape, and the Studios. 65. As elaborated in the declaration of Fox's Michael Dunn, the Studios are actively

working on a number of products designed to provide consumers with the ability to obtain a second digital copy of DVDs that they purchase. The Studios acknowledge that RealNetworks is
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a competitor to at least two of these products: "digital copy," which is already available for many movie titles, and so-called "managed copy" -- which the Studios are working to define in the context of a multi-industry agreement. 66. Digital copy is a product that the Studios are marketing where a DVD is sold with

an additional "digital copy" version of the content (a second disc), where the second disc can be copied onto the consumer's computer hard drive (without CSS encryption). As Mr. Dunn declares: "`Digital Copy' versions of DVD movies are sold ­ at a higher cost than the regular version of the same movie ­ with an extra disc containing additional features. One of the features of the second disc is the ability to place it in a computer's DVD drive and copy the movie to a computer's hard drive." Mr. Dunn continues: "Digital Copy is particularly relevant because it allows consumers to purchase from the Studios that which RealDVD is trying to sell for its own benefit." (Dunn Decl., para 17.) The cost for this "second disc"? Roughly $4.00 for each individual disc. 67. Managed copy is simply the ability to make a copy of the content on a standard

definition DVD (as opposed to high-definition Blu-ray discs) onto a consumer's computer hard drive. As Mr. Dunn again declares: "This capability, referred to (sic) `Managed Copy' is, once again, similar to RealDVD's functionality, in that it allows consumers to have content both on a DVD and on their computer's hard drive. The critical difference is that (a) Managed Copy will be authorized by the content owners and (b) it will allow the content owners to capture the extra value that it brings to the consumer." (Dunn Decl., para 19.) 68. Mr. Dunn also mentions "Burn-to-DVD," which is another technology that will

allow a consumer to create a DVD after purchasing a download of a movie or television show. (Dunn Decl., para. 18.) The DVD CCA recently approved an amendment to the CSS Specifications that permits each Studio to decide independently whether and whom it will authorize to enable the creation of such DVDs. The Co-Conspiring Studios' Market Power 69. The Studios comprise the largest and most powerful collection of motion picture

companies in the United States and compete with each other in the market for motion picture
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content. The audio-visual works that the Studios create and own make up a predominate percentage of the content suitable for family viewing available to consumers on DVD. These competing Studios dominate the market for copyrighted motion picture content, which is an essential input into not only the RealDVD and the Facet products, but also other products that have similar functionality to RealNetworks' products. The Studios thus not only compete in the relevant market but also collectively control an element essential to effective competition in the relevant market. The Group Boycott: Refusing to Deal with RealNetworks 70. The Studios have entered into a "contract, combination, or conspiracy," within the

meaning of Section 1, among the Studios. This is so in two respects. 71. Should the DVD CCA and Studios' interpretation of the CSS License Agreement

prevail, then the contract stands as a binding (until declared unlawful) agreement among them to boycott RealNetworks until RealNetworks assents to their collectively-imposed terms. If the DVD CCA and the Studios are incorrect in their interpretation, as RealNetworks submits, their joint attempt to block competition in the market for these "new digital products" by collectively refusing to deal with RealNetworks similarly violates Section 1. The Group Boycott Has Harmed RealNetworks 72. RealNetworks initially planned to launch Vegas upon the announcement of the

product at a technology conference on September 8, 2008. RealNetworks made an ambitious and expensive public relations and advertising effort to prepare for the initial launch. When RealNetworks delayed the launch of Vegas to September 30, 2008 while it attempted to address the Studios' concerns regarding the product, RealNetworks attempted to recreate as much as possible the initial public interest that surrounded the product at the time of the planned initial September 8 launch. However, despite RealNetworks' efforts, many of the publications that had already generated press regarding Vegas were not willing to run second articles on the product. 7