Official Statement regarding the Court of Appeal’s Decision in DVD Copy Control Association, Inc. v. Kaleidescape, Inc.

We are surprised and disappointed by the Court of Appeal’s decision and by their rejection of existing California contract law.

In the 2007 trial, the DVD CCA claimed that Kaleidescape breached the CSS License Agreement and in particular, that Kaleidescape did not comply with a document called the “General Specifications.” Kaleidescape successfully argued at trial that the General Specifications document was not a part of the original contract since it was never referenced in the CSS License and was not provided to Kaleidescape until after the contract had been entered into. In addition, Kaleidescape presented evidence at trial that its products fully comply with the General Specifications anyway. In 2007, the trial court agreed with Kaleidescape that the General Specifications are not a part of the original contract. Because of this, the trial court did not clearly rule on whether Kaleidescape complies with the General Specifications. The Court of Appeal has now ruled that the General Specifications are a part of the contract, but did not decide whether or not Kaleidescape complies with them. The Court of Appeal has sent this back to the trial court to decide.

The new proceedings by the trial court will likely take place in a year or two, unless the California Supreme Court agrees to review the Court of Appeal’s decision. Kaleidescape will continue to fight, and we expect to prevail. However, it may take many years for this issue to be fully and finally resolved.

In the meantime, Kaleidescape Systems remain 100% licensed and legal. We will continue selling Kaleidescape Systems, developing innovative products and technologies, and providing excellent service to our customers, including the Movie Guide, the Music Guide, automatic software updates, and automatic service alerts. The Blue-Laser Player is still on schedule for release in 2009.




FREQUENTLY ASKED QUESTIONS

General Questions

1. What happened at the Court of Appeal? Did they decide that Kaleidescape breached the CSS License Agreement?
The Court of Appeal did not find that we breached the license agreement, only that a document titled, “General Specifications” is part of the CSS License Agreement. The Court of Appeal ordered us back to the trial court for further proceedings to interpret the “General Specifications” and to determine if there is any breach.

2. What is Kaleidescape’s reaction to this?
We are surprised and disappointed by the Court of Appeal’s decision. However their decision just sends us back for further proceedings by the trial court in a year or more. We will also be appealing the Court of Appeal’s decision to the California Supreme Court.

3. How does the order affect Kaleidescape’s business?
It doesn’t. Kaleidescape Systems remain fully licensed and 100% legal and there has been no court ruling to the contrary. We will continue selling Kaleidescape Systems, developing innovative products, and providing excellent service to our customers.

4. Will existing and new customers continue to receive the Movie Guide and automatic software updates?
Yes. We will continue to provide excellent service and support to all of our customers, including the Movie Guide, the Music Guide, automatic software updates, and automatic service alerts.

5. Are Kaleidescape products “legal”?
Absolutely. Kaleidescape Systems remain 100% legal. The Court of Appeal did not rule that Kaleidescape is in breach of the CSS License.

6. Does this have any effect on the Blue-Laser Player expected to be available later this year?
No. The Blue-Laser Player is still on schedule for release in 2009.

7. Would it help for Kaleidescape to offer Internet Content Delivery so that our clients can purchase licensed content without having to import it from DVDs?
Yes, it would help, and the forthcoming Blue-Laser Player will be able to play content, not only from Blu-ray Discs, but from other future sources, including the Internet. However, a large percentage of today’s content is available only on DVD, and people want to be able to enjoy what they already own.

8. Where can I read about Kaleidescape’s comments on the Court of Appeal’s decision?
Please go to http://www.kaleidescape.com/legal-update.

9. Is Kaleidescape planning to continue to fight this case? We thought you were compliant with all licenses, etc.
Kaleidescape complies with all its licenses, including the CSS License. There has been no finding to the contrary. The Court of Appeal decided that the General Specifications document is part of the CSS License, but said nothing about whether Kaleidescape breaches anything in that document or even if there are any requirements in that document. They sent that question back to the trial court for further proceedings. Yes, we will continue to fight and we expect to prevail.


Legal Questions

10. What precisely was the ruling?
The Court of Appeal ruled that the General Specifications document is part of the contract, and sent us back to the trial court for further proceedings. However, we intend to appeal that decision and if the California Supreme Court agrees to review the decision and determines that the General Specifications are not incorporated into the contract after all, then the matter should be resolved.

11. How does this ruling fit into the story?
In the 2007 trial, the DVD CCA claimed that Kaleidescape breached a certain document called “General Specifications.” As a first line of defense, Kaleidescape argued that this document is not even part of the contract. As a second line of defense, Kaleidescape presented evidence that, even if it was part of the contract, Kaleidescape complies with it anyway. The trial court agreed that the General Specifications is not part of the contract, and so the first line of defense was enough. Because it was enough, the trial court did not clearly rule on whether Kaleidescape complies with it. The Court of Appeal has now ruled that this document is part of the contract after all. So now the trial court must decide whether Kaleidescape complies with it or not. Kaleidescape believes that it is in compliance with any applicable terms of this document.

12. Does this close the loophole through which Kaleidescape won the first trial?
There was never any “loophole.” In the 2007 trial, the DVD CCA claimed that Kaleidescape breached the General Specifications document. One of Kaleidescape’s defenses was that this document is not part of the contract. The trial court agreed with this but the Court of Appeal has disagreed. However, we believe Kaleidescape complies with that document anyway.

13. Did the Court of Appeal rule that Kaleidescape breached the CSS License?
No.

14. What is Kaleidescape’s opinion of the ruling?
The Court of Appeal rejected existing California contract law and determined that a document, which Kaleidescape did not know about when it entered into its contract with the DVD CCA and which isn’t even mentioned in the contract is nevertheless part of that contract. We believe this is wrong and we will ask the California Supreme Court to review this decision.

15. What’s going to happen next?
We will ask the California Supreme Court to review the decision of the Court of Appeal. Because of the nature of the legal proceedings and the right to appeal, it could take many years before this issue is finally resolved.

16. Don’t fair use rights have an overriding bearing in this matter?
This is a case of California contract law, and is not a copyright case. So, although we believe our customers have a fair use right to import their CDs and DVDs into the Kaleidescape System, this fact has little to do with the DVD CCA lawsuit.

17. How is this ruling related to the preliminary injunction issued against Real DVD?
Although the rulings were made one day apart, they are unrelated. The Real DVD case is different in many ways. The Real DVD product is a PC software product; therefore Real DVD is subject to different license terms than Kaleidescape. Also, the Real case involves copyright claims while the Kaleidescape case is strictly a breach of contract claim.

18. What is Kaleidescape’s position on the rights of content owners?
Kaleidescape believes firmly in intellectual property rights. Kaleidescape itself has invested heavily in its own intellectual property, and depends on the protection of its software under copyright law and the protection of its many inventions under patent law. Kaleidescape has even been granted patents on content protection inventions. However, Kaleidescape does not believe that the rights of content owners go so far that they should be allowed to suppress innovation and deny fair use rights to consumers. We are disappointed that the DVD CCA and the Hollywood studios feel otherwise.


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