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A three-judge panel of the U.S. Court of Appeals for the Second Circuit seemed awfully skeptical last December, when lawyers for the online television start-up Aereo Inc. tried to argue that their service doesn’t trample on network TV copyrights. But the panel ruled 2-1 Monday that Aereo’s unusual strategy for avoiding copyright liability is most likely legal, handing a big setback to the networks and a huge win to Aereo.

Aereo, a venture backed by billionaire Barry Diller, relies on creative (some would say convoluted) technology to ward off copyright liability. Rather than capturing network programming with a powerful antenna and streaming it to users, the company assigns each subscriber a unique miniature antenna in a Brooklyn warehouse, effectively renting access to New York’s television market.

As you’d expect, the networks haven’t taken kindly to Aereo’s business model. Local New York stations and national networks including ABC, NBC, PBS, and FOX sued the company in March 2012, accusing Aereo of violating copyright law and demanding an injunction to block the service. Aereo prevailed against the networks’ preliminary injunction bid in July, however, persuading U.S. District Judge Alison Nathan in Manhattan that their copyright claims were likely to fail.

Both at the district court and on appeal, the networks’ arguments hinged on the judges’ interpretation of the Second Circuit’s 2008 ruling in Cartoon Network v. CSC Holdings. In that case, referred to as Cablevision, the appellate court ruled that Cablevision’s remote digital video recording service didn’t "publicly perform" the programs it recorded, and therefore didn’t run afoul of copyright law.

During oral arguments in December, Aereo counsel R. David Hosp of Fish & Richardson (then at Goodwin Procter) told the Second Circuit panel that the company’s Brooklyn antenna set-up was analogous to Cablevision’s DVR service, which allowed users to make individual copies of shows and store them on Cablevision servers. The plaintiffs, represented by Bruce Keller of Debevoise & Plimpton and Jenner & Block’s Paul Smith, countered that the Cablevision case was different because Cablevision had a license to transmit the programs in the first place, while Aereo did not.

The Second Circuit majority didn’t buy the networks’ argument. "Cablevision did not hold that Cablevision’s RS-DVR transmissions were licensed public performances; rather it held they were not public performances," Circuit Judge Christopher Droney wrote for himself and U.S. District Judge John Gleeson of Brooklyn (sitting by designation).

Circuit Judge Denny Chin, on the other hand, wrote in a 27-page dissent that Aereo’s system is nothing more than a "sham" designed to evade copyright laws. "[T]here is no technologically sound reason to use a multitude of tiny individual antennas rather than one central antenna; indeed, the system is a Rube Goldberg-like contrivance, over-engineered in an attempt to avoid the reach of the Copyright Act and to take advantage of a perceived loophole in the law," Chin wrote.

Aereo’s lawyers, Michael Elkin of Winston & Strawn and Fish & Richardson’s Hosp, declined to comment. Jenner & Block’s Smith referred requests for comment to his clients. "Today’s decision is a loss for the entire creative community," the networks said in a joint statement. "The court has ruled that it is ok to steal copyrighted material and retransmit it without compensation."

Click here for additional coverage from our colleagues at the New York Law Journal.

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