Weil, Gotshal & Manges LLP

Protecting DVD Trade Secrets in an Internet World

Sugarman, Robert G.

(March 2002, Metropolitan Corporate Counsel)

By  Jeffrey Kessler and Robert Sugarman

In late 1999, DVDs were well on their way to becoming the fastest-growing and most rapidly-adopted consumer electronics product ever. But, just as the popularity of the DVD format started to take off, a group of computer hackers and others broke the encryption system for DVD motion pictures and posted it on the Internet, thereby threatening the viability of DVDs and putting entertainment and technology companies at risk.

This firm has been working on behalf of a trade association of leading motion picture, consumer electronics, and computer companies - the DVD Copy Control Association (DVD CCA) - to counter those efforts, and to protect the future of trade secrets in an Internet world.

Interestingly, one of the main reasons the DVD format is so innovative and attractive to consumers is exactly what makes it potentially vulnerable to copying. Because DVDs store movies in a digital format that is perfectly reproducible every time movies are recorded and played on DVDs, for the first time people can view movies at home with crystal clarity and high quality audio. Yet the fact that the movies are stored digitally also means it is possible for someone to make an infinite number of perfect copies of DVD movies, unless the digital content of the DVDs is protected in a way that prevents this copying.

Facing this challenge, the contents of DVDs are encrypted using a proprietary encryption system called "CSS" - the Content Scramble System - which protects the copyrighted works on DVDs by preventing them from being copied. The client, the DVD CCA, licenses this encryption trade secret to the consumer electronics companies that make DVD players, the content companies that make DVD discs, and the computer companies that make components for DVD drives.

But, in 1999, the DVD industry discovered that a group of computer Internet hackers, including a Norwegian teenager named Jon Johansen, had taken apart a piece of DVD CCA-licensed software, and had stolen the CSS-encryption trade secrets from it. Johansen and others then incorporated the CSS trade secrets into a new software utility they called "DeCSS," which enabled DVDs to be decrypted so that movies could be transferred onto a computer in a copyable format. Once someone used DeCSS to copy a movie to a computer hard drive, any number of unencrypted copies of that movie could then be made or sent over the Internet. The utility allowed anyone to decrypt the security protections found on every DVD against making and playing perfect digital copies of copyrighted movies. The hackers then began to distribute DeCSS over the Internet.

The DVD industry faced a critical legal issue: could existing intellectual property laws be used to protect against the theft of trade secrets on the Internet, as had occurred here? So, a team of litigators quickly filed a complaint against 72 named defendants (and other unnamed "John Doe" defendants) for violations of California's Trade Secret Act, and applied for preliminary injunctive relief in California state court. Because California's trade secret law applies not only to those who directly misappropriate a trade secret, but also to anyone who uses or discloses a trade secret with actual or presumed knowledge that the information had been derived using improper means, the DVD industry was able to assert California state law claims against those posting the code on the Internet even if they were not involved in the original hacking effort or the creation of DeCSS.

In court, members of the WGM litigation team argued that, at its heart, the case boiled down to a simple case of theft of trade secrets. DeCSS was able to decrypt CSS-encrypted movies only because the hackers had stolen DVD CCA's proprietary information in violation of numerous confidentiality restrictions, including software "click-license agreements." Furthermore, the risk of harm was real and imminent, since without its encryption, movie studios would be reluctant to offer consumers copyrighted movies on DVDs, putting the entire DVD industry - and DVD CCA - at risk.

When the defendant computer hackers responded that their right to distribute DeCSS was protected "speech" under the First Amendment, our team argued that the First Amendment does not shield against the theft of trade secrets: cracking CSS and distributing DeCSS over the Internet was not protected any more than breaking into Coca-Cola's corporate offices and distributing copies of Coke's secret formula. The trial court agreed, and granted DVD CCA a preliminary injunction prohibiting all of the defendants - including the John Doe defendants - from posting or distributing DeCSS. But that ruling has just been reversed by the intermediate court of appeals in California, in a decision that gives unconditional primacy to the First Amendment and the unfettered dissemination of information on the Internet over a request for preliminary injunctive relief. The injunction against the defendants, however, is still being maintained until the appellate decision is reviewed by the California Supreme Court, which DVD CCA is requesting.

The ongoing battle over the theft of trade secrets using the Internet has another front as well. One of the defendants who was involved in the misappropriation and dissemination of the DVD encryption trade secrets - Matthew Pavlovich - lives in Texas. Pavlovich challenged the California court's ability to exercise personal jurisdiction over him, claiming that he had no knowledge that DVD CCA was located in California (and indeed that he did not even know that DVD CCA existed). This past summer, the intermediate California appeals court affirmed the lower court's decision that the California trial court could exercise personal jurisdiction over Pavlovich because he knew that California was the center of the movie and computer software industries, which the dissemination of DeCSS would injure. This decision - which Pavlovich has appealed to the California Supreme Court - is important because it prevents hackers from attacking others through cyberspace and then claiming they may not be sued where their victims reside.
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