Is Zediva’s New-Release Movie Streaming Service Legal?

Zediva — a new online movie service that gets around the need for studio licensing deals by renting users a physical disk and DVD player from afar — has proven to be a hit with consumers, who have stormed the startup since its launch last week.

While Zediva’s popularity with public is clear, the legality of the service — and the movie industry’s opinion of the company — couldn’t be murkier.

Zediva buys physical copies of new-release movies, and plays them one at a time on physical DVD players located at the company’s servers; customers rent a player for $2, and the user’s computer acts as the remote. Only one customer can watch a given DVD at a time, which the company says gives them legal cover since it makes them not really different from a traditional video-rental store or Netflix’s DVD-by-mail service.

But James Grimmelmann, an associate law professor at New York Law School who specializes in online legal issues, says the company is all but doomed, anyway.

“Zediva’s supposed ‘loophole’ in copyright law doesn’t exist,” Grimmelmann wrote in a blog post after Zediva launched. “Zediva is about to get pounded by the movie studios, and hard.”

Copyright law gives movie studies the sole ability to license “public performances” of movies — such as a movie theater screening a film. Grimmelmann says he assumes that Zediva thinks streaming a DVD player to a customer is a private performance, and thus not an infringement.

But the courts have ruled otherwise, according to Grimmelmann, who cites a 1984 case in which a video store rented movies for customers to watch in booths within the store. The company was sued, and ultimately found liable for copyright infringement.

“Although Maxwell’s has only one copy of each film, it shows each copy repeatedly to different members of the public,” the court ruled. “This constitutes a public performance.”

But Jason Schultz, an associate professor at Berkeley Law School, disagrees that the progonosis for Zediva is quite so grim.

“I think they are in gray zone,” Schultz said. “In the modern world of innovation and copyright you are never in the clear, and they are taking huge risks.”

If Zediva is sued, the real question will come down to which cases from the 1980s and ’90s the judges choose to apply, and what panel of judges on California’s 9th U.S. Circuit Court of Appeals wind up handling the inevitable appeal, according to Schultz.

Zediva has two defenses that might be compelling, Schultz says.

One focuses on the “first sale” doctrine of copyright law, which allows those who buy a copyrighted work to re-sell it and even to do things like compile books into a package, modify the cover art and repair a book, so long as the copy was legitimately purchased.

“The first sale [doctrine] allowed Netflix and Redbox to come into existence and a court might be sympathetic because Zediva is trying to respect one-copy limitations,” Schultz said. “If the company is buying legitimate copies they could rent out in a physical world, why not let them rent it out digitally with each rental tied to a physical copy with only one person using it at a given time? The economics are quite similar.”

Zediva’s argument can be: “You shouldn’t punish us because we are innovating.”

“I think it doesn’t sound stupid and this business model isn’t going to devastate the movie industry,” Schultz said. “If it’s a popular movie, they are going to have to buy hundreds or thousand of copies, versus Napster where one copy leads to 40 million copies.”

Both Schultz and Grimmelmann agree that a more recent case challenging Cablevision’s digital video recorder in the cloud would also shape any case against Zediva — though they differ on the interpretation. Cablevision was sued for a product that works like home digital video recorder, but which records and plays back shows from its servers, making it unnecessary for users to have a hard-drive-based DVR at home.

Cablevision won the case, but the decision seemed to mostly focus on the fact that when users decided to record a copy of a show, each got their own specific copy.

That, according to Grimmelmann, won’t apply to Zediva.

“The court there held that these transmissions of earlier-recorded shows weren’t ‘public’ performances because ‘the universe of people capable of receiving an RS-DVR transmission is the single subscriber whose self-made copy is used to create that transmission,’” Grimmelmann wrote, quoting the decision. “Thus, Cablevision’s service wasn’t infringing.”

But Cablevision won because it’s like a set-top box, Grimmelmann argues, while Zediva is more analogous to a streaming service than to the corner video store.

“Here, the closest analogy is Netflix streaming, which requires licenses from copyright owners, and obtains them,” Grimmelmann wrote. “I could see some of the other innovative but edgy business models in the copyright space succeeding with the courts, but not this one.”

Schultz, however, sees some glimmer in the Cablevision case for Zediva, as it shows that courts are sympathetic to the idea that what happens in the home is private, not public.

“Zediva doesn’t have control over the user and where they watch it,” Schultz argues. “There is a history of the law of respecting private performances in your own home, and it starts to feel like Columbia vs. Professional Real Estate.” (That California case found that a hotel renting video discs to its customers to watch in their rooms did not constitute a public performance and was legal.)

“Zediva might fit into that model,” Schultz said. “It’s new world where we don’t know where a user is.”

But the best hope of all for Zediva is for the company to strike a deal with the studios, Schultz argues. Zediva could get a reliable and discounted supply chain for new releases, while the studios could get guaranteed thousands of disc purchases and a percentage of revenue.

But that’s unlikely. Hollywood studios are extremely protective of the first month after a DVD release — where they hope to make millions off DVD purchases. In fact, Netflix inked deals where it will not rent new releases for a month in exchange for more rights to stream the studios’ deep libraries of movies.

Which makes it all the more likely that the coolest new video-streaming service will likely find itself, like so many other media innovators before it, spending its energy defending itself in court, rather than focusing single-mindedly on making something people want.