DVDCCA-vs-Kaleidescape-Cross-Complaint

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1 KEKER & V AN NEST , LLP
JOHN W. KEKER #49092
DARAL YN J. DURIE #169825
ASIM M. BHANSALI #194925
710 Sansome Street
San Francisco , CA94111- 1704
Telephone: (415) 391- 5400
Facsimile: (415) 397- 7188

Attorneys for Defendant
6 KALEIDESCAPE , INC.
(::;iark

SUPERIOR COURT OF THE STATE OF CALIFORNIA

IN AND FOR THE COUNTY OF SANTA CLARA

DVD COpy CONTROL ASSOCIATION Case No. 1 04 CV 031829
12 INC. , a Delaware corporation
KALEIDESCAPE , INC. S CROSS-
Plaintiff COMPLAINT FOR:
BREACH OF CONTRACT;
15 KALEIDESCAPE , INc. , a Delaware BREACH OF THE COVENANT OF
corporation GOOD FAITH AND FAIR
DEALING; AND
Defendant.
DECLARATORY RELIEF UNDER
CCP ~ 1060.
18 KALEIDESCAPE , INC. , a Delaware
corporation Date Compl. Filed: December 7 , 2004

Cross- Plaintiff Trial Date: None set

DVD COpy CONTROL ASSOCIATION
22 INC. , a Delaware corporation

Cross- Defendant.

351209. KALEIDESCAPE , INc.' S CROSS- COMPLAINT
Case No. 04 CV 03 1829
'"

Nature of Cross- Claim
This Cross- Complaint involves DVD Copy Control Association s (" DVD CCA"
breach of contract and of the covenant of good faith and fair dealing. DVD CCA , whose
controlling members include consumer electronics manufacturers and computer manufacturers

that compete with Kaleidescape , brought this action in violation of contractual obligations set by

documents that DVD CCA or certain key members themselves drafted.

Jurisdiction and Venue
This Court has jurisdiction over this Cross- Complaint under Code of Civil
Procedure gg 426.30 428. , and 1060. The Cross- Complaint asserts causes of action related to

the causes of action in Plaintiffs ' Complaint and is asserted against the party who filed the
Complaint against Kaleidescape.

Venue is proper in this County under Code of Civil Procedure g 395.

Parties
Cross- Plaintiff Kaleidescape , Inc. (Kaleidescape) is a Delaware corporation with
its principal place of business in Mountain View, California. Kaleidescape was founded in 2001
to deliver a substantially improved entertainment experience to home theaters and media rooms.
Kaleidescape designs and sells entertainment servers and provides associated software and
services to allow customers to securely store and readily access large movie collections. Since
its founding in 2001 , Kaleidescape has invested millions of dollars in developing its products and

services. This substantial investment has resulted in Kaleidescape owning numerous patent-
pending technologies for viewing, organizing, accessing, and protecting digital movies and other
digital content. Kaleidescape s patent- pending technologies include one that allows DVD
content to be copied while keeping intact DVD CCA' s Content Scramble System , or " CSS" (the

technology licensed by the DVD CCA , which is intended to provide " reasonable security for

content on DVD Discs ). Kaleidescape has won numerous awards for its innovative product
design , such as the Consumer Electronics Association s TechHome Division " 2005 Mark of

Excellence Award " the Robb Reports Best of the Best 2005 " Popular Science s " Best of
What's New 2004 " Electronic House s " Product of the Year 2004 " the Custom Electronic

351209. KALEIDESCAPE , INC. S CROSS- COMPLAINT
Case No. 1 04 CV 031829
Design and Installation Association s Electronic " Lifestyles Award" in 2003 , and CEPro s " High

Impact Product of the Year" award in 2003. Kaleidescape s actual and potential competitors
include consumer electronics makers and computer manufacturers who are DVD CCA members.

Cross- Defendant DVD CCA is a Delaware corporation with its principal place of

business in Morgan Hill , California. DVD CCA exclusively licenses the CSS technology, and
has licensed the CSS technology to Kaleidescape pursuant to a " CSS License Agreement"
(hereinafter " CSS License Agreement" or " License Agreement"

The KaleidescaDe System
Kaleidescape s System is a unique product that substantially improves the home
theater experience over a conventional DVD player , DVD changer, or home media computer.
Kaleidescape has developed a distributed media server system that allows users to' organize and

manage large collections of digital movie content , such as a DVD collection , and view those
movies from anywhere in the home. Kaleidescape s System also includes parental-control
features that allow users to control access to particular content from certain parts of a home , such
as children s rooms. Kaleidescape s System offers numerous other features that help organize
and manage a large DVD collection , including a way to play multiple favorite scenes from
different movies owned by the customer, as well as a user interface that uses cover art and is so

easy to use that children can find and select movies even if they are too young to read.

Kaleidescape has also developed a proprietary Internet- based Movie Guide Service. The Movie
Guide Service allows a user to review useful information when browsing through the titles in the

user s movie collection , including title , genre , cast , rating, director, and synopsis , and to sort all

the movies he or she owns by a particular actor or director. As an added benefit , when a user
selects a movie to view , the Kaleidescape System provides instant access to the movie , without

having to physically load the disc , wait for the disc to be physically read , or set menu

preferences. No conventional DVD player , DVD changer , or home media computer available

today provides these features. The Kaleidescape System is also being purchased and used by

corporations to serve digital video content that is not protected by CSS , such as corporate

training videos. The Kaleidescape System will also be used to serve digital music content when

351209. KALEIDESCAPE , INC.'S CROSS- COMPLAINT
Case No. 1 04 CV 031829
(' - ".--

a new version of the software is released.

Kaleidescape s System works by allowing a user to load all of his or her digital

content through a Kaleidescape Reader onto one or more Kaleidescape Servers located in the
user s home. For DVD content, the user inserts a DVD into the Kaleidescape Reader, and the

Reader imports a copy of the DVD movie onto a Server. If the DVD is protected by CSS , this
copy remains CSS-encrypted , or " scrambled " when stored on the Server. Each Kaleidescape

Server can hold the contents of up to 660 DVDs , and a user may cluster together multiple

Servers in a single home in order to increase storage capacity. Once a DVD movie is loaded
onto the Server , a user can play it using the Kaleidescape Movie Player. The Kaleidescape

System allows users to view more than one movie at a time through multiple Movie Players , so
that different people in the same home can watch movies at the same time. At present , no

generally available conventional DVD player , DVD changer , or home media computer allows
users to view multiple movies simultaneously.

Kaleidescape has taken significant steps to ensure the security ofDVD content.
The Kaleidescape System is a closed , secure system that makes use of an encryption algorithm
that is significantly more secure than the CSS algorithm licensed by the DVD CCA: It does not
allow a user to make a copy of DVDcontent other than the single digital copy made when a user
loads the disc into the Kaleidescape Reader. The security features ofthe Kaleidescape System
preclude the user from using that single digital copy for any purpose other than viewing through
a Kaleidescape Movie Player located in the same home. The user cannot make , distribute or
transmit any further copies of the DVD. These security features offer far greater protection for

movie content than currently available through other means.

To further enhance security, Kaleidescape has developed technology that keeps
CSS intact when the digital copy is made. In the Kaleidescape System , the contents of a DVD

are descrambled in the Kaleidescape Player hardware , and only immediately prior to

transmission for on-screen display, just as with a conventional DVD player. The descrambled

content is not stored , and thus remains unavailable after playback , just as in a conventional DVD

player. Kaleidescape is the first company to develop the technology to keep CSS intact when the

351209. KALEIDESCAPE , INC.'S CROSS- COMPLAINT
Case No. I 04 CV 031829
,"

digital copy is made , and Kaleidescape has a patent application pending that covers this

technology. As alleged in paragraph 4 , Kaleidescape has invested millions of dollars in
developing this and other technologies used in its System , and has received numerous industry

awards for its innovative technology.

Content Scramble System
10. CSS is a system intended to provide "reasonable security for contents on DVD
Discs " and is used to encrypt the content of a DVD. Each CSS-encrypted DVD contains 400 or

so encrypted disc keys. A CSS- licensed DVD player, DVD changer , or home media computer

has one or more player keys. The player and disc keys interact in order to descramble the data
on the DVD for playback. In a conventional DVD player , DVD changer , or home media
computer , as in Kaleidescape s System , the DVD contents remain scrambled until immediately

prior to transmission for on-screen viewing, and unscrambled content is not saved in memory or
otherwise stored after viewing.

DVD CCA' s Breach of Contract And Lack of Good Faith
11. On or about December 22 2003 , DVD CCA , through counsel , sent a letter to
Kaleidescape indicating DVD CCA' s belief that Kaleidescape was violating the CSS.License

Agreement. DVD CCA expressed its view that , among other violations , Kaleidescape was
using, and was marketing for customers to use , its product for the " illegal purpose of making

unauthorized copies " of " CSS Data " (a term which the Procedural Specifications define as
digital data originally scrambled on DVDs using CSS). DVD CCA also expressed its view that
Kaleidescape was doing so , and marketing its System for customers to do so in circumvention
of the CSS copy control system. " Upon information and belief, DVD CCA knew atthe time it

made this claim that Kaleidescape s System did not have the " illegal purpose " of making

unauthorized copies ofCSS Data. " Upon information and belief, DVD CCA also knew at the
time it made its claim that the copying of CSS Data left intact in scrambled form by

Kaleidescape s System did not violate the CSS License Agreement or any included specification.

Therefore , upon information and belief, DVD CCA' s claim that Kaleidescape was using and

marketing its System " for the illegal purpose of making unauthorized copies of CSS Data in

351209. KALEIDESCAPE , INC.'S CROSS- COMPLAINT
Case No. 1 04 CV 031829
circumvention of the CSS copy control system " was not made in good faith.

12. At DVD CCA' s request , in February 2004 Kaleidescape executed a separate
confidentiality agreement , pursuant to which Kaleidescape would provide information to a

consultant retained by the DVD CCA about how Kaleidescape s System works. The consultant

was to use the information to consider whether Kaleidescape s System complied with the CSS

License Agreement. However, after Kaleidescape prepared a paper that explained why and how

Kaleidescape complied with the CSS License Agreement and disclosed sensitive information
about Kaleidescape s System , DVD CCA refused to provide that paper to the consultant DVD

CCA had retained. DVD CCA offered no explanation for its action, other than its view that
Kaleidescape sought to use the paper as a "persuasive tool" to advocate Kaleidescape s own
position regarding proper interpretation of the CSS License Agreement and related
specifications. DVD CCA' s failure to provide Kaleidescape s paper to DVD CCA' s own

consultant demonstrates that DVD CCA believed that Kaleidescape did not violate the CSS
License Agreement.

13. Following a meeting between the consultant engaged by DVD CCA and
Kaleidescape , DVD CCA then invoked the Ombudsman process for dispute resolution , as set
forth in its By- law 6. 6. Section 3.2 of the CSS License Agreement provides that Kaleidescape
through its membership in the DVD CCA , is entitled to the "rights and privileges " established

under DVD CCA' s By- laws. Those rights and privileges include the right to an Ombudsman '

administered dispute-resolution process before having suit filed against it by the DVD CCA.

14. Before filing suit , the DVD CCA must select an Ombudsman. If the Ombudsman
cannot bring the parties to a negotiated resolution , By- law 6. 6 requires that "he shall be

permitted to recommend to the Board of Directors that the Corporation initiate enforcement

action or that the member is in compliance and no further action need be taken. . . . " Although

the Ombudsman s recommendation is not binding, permitting him or her to make a

recommendation is a pre-requisite to filing suit.

15. In its dispute with Kaleidescape , DVD CCA invoked By- law 6. 6 and it selected
an Ombudsman , who turned out to be the same consultant previously selected by the DVD CCA

351209. KALEIDESCAPE , INC.'S CROSS- COMPLAINT
Case No. I 04 CV 031829
as described in paragraph 12 above. Kaleidescape participated in the dispute resolution process
in good faith , including providing sensitive , confidential information to the Ombudsman. DVD

CCA did not participate in good faith. Kaleidescape never had any opportunity to interact with
the DVD CCA' s representatives , other than through the Ombudsman. Upon information and

belief, DVD CCA filed this action before the Ombudsman made a recommendation regarding
resolution of the dispute. Thus , upon information and belief, DVD CCA did not permit the

Ombudsman to make a recommendation prior to DVD CCA filing suit, as required by By- law
, and thus Section 3.2 of the License Agreement.

First Claim for Relief
Breach of Contract

16. Kaleidescape incorporates Paragraphs 1 - 15 above by reference.

17. The CSS License Agreement requires DVD CCA to comply with DVD CCA'
own By- laws. By- law 6. 6 sets forth a process for referring disputes to an Ombudsman and
requires all parties to the dispute to permit the Ombudsman to make a recommendation regarding
resolution of the dispute before filing suit.

18. Upon information and belief, DVD CCA filed this action before the Ombudsman
made a recommendation regarding resolution of the dispute. DVD CCA therefore breached its
obligation to complete the mandated dispute-resolution process.

19. Kaleidescape has suffered injury and damages as a result ofDVD CCA' s conduct.

Second Claim for Relief
Breach of the Covenant of Good Faith and Fair Dealing

20. Kaleidescape incorporates Paragraphs 1 - 19 above by reference.

21. DVD CCA' s claim that Kaleidescape was using and marketing its System " for the
illegal purpose of making unauthorized copies of CSS Data in circumvention of the CSS copy

control system " was objectively unreasonable because Kaleidescape was not using or marketing

its System for any such " illegal purpose " nor was it making copies of CSS Data "

circumvention of the CSS copy control system " or otherwise in violation of the CSS License

Agreement. Upon information and belief, DVD CCA did not believe that claim to be valid at the

351209. KALEIDESCAPE , INc.' S CROSS- COMPLAINT
Case No. 1 04 CV 031829
time it was made , as shown by DVD CCA' s subsequent conduct in the dispute-resolution

process.

22. DVD CCA failed to participate in the Ombudsman dispute-resolution process in

good faith and failed to complete that process. Upon information and belief, DVD CCA did not

believe that its conduct in the dispute-resolution process was valid under the CSS License
Agreement and the By- laws , at the time DVD CCA engaged in the conduct.

23. DVD CCA' s actions therefore breached the covenant of good faith and fair
dealing implied in the CSS License Agreement.

24. Kaleidescape has suffered injury and damages as a result ofDVD CCA' s conduct.

Third Claim for Relief
Declaratory Relief Under CCP ~ 1060

25. Kaleidescape incorporates paragraphs 1 - 24 above.

26. An actual controversy relating to the legal rights and duties of Kaleidescape and
DVD CCA under the CSS License Agreement exists with respect to the following matters:

Whether the CSS License Agreement requires Kaleidescape to implement
architectures that prevent the making of persistent digital copies;
Whether the CSS License Agreement bars Kaleidescape from selling a
system that makes persistent digital copies;
Whether the CSS License Agreement requires Kaleidescape to implement
architectures in which the user must have the physical DVD disc in the

drive during playback;

Whether the CSS Lice~se Agreement bars Kaleidescape from selling a

system that allows viewing of CSS-protected content previously encoded

on a DVD without having the DVD physically present in a drive during

transmission of that content to the screen; and

Whether the Kaleidescape System is clearly designed to effectively

frustrate attempts to defeat the copy protection functions of CSS.
27. Kaleidescape therefore seeks a declaration of its rights under the CSS License

351209. KALEIDESCAPE , INc.' S CROSS- COMPLAINT
Case No. 1 04 CV 031829
Agreement , including the following determinations:

That the CSS License Agreement does not require Kaleidescape to
implement architectures that prevent the making of persistent digital

copIes;

That the CSS License Agreement does not bar Kaleidescape from selling a
system that makes persistent digital copies of CSS- protected content

previously encoded on DVDs;
That the CSS License Agreement does not require Kaleidescape to
implement architectures in which the user must have the physical DVD
disc in a drive during the transmission of that content to the screen;
That the CSS License Agreement does not bar Kaleidescape from selling a
system that allows viewing of CSS-protected content previously encoded
on DVDs without having the physical DVD disc present in a drive during
transmission of that content to the screen; and
That the Kaleidescape System , because of its security protections , is
clearly designed to effectively frustrate attempts to defeat the copy
protection functions of CSS.

Prayer for Relief
WHEREFORE , Cross- Plaintiff Kaleidescape prays for judgment and relief against Cross-
Defendants as follows:

An award of actual damages according to proof;
An award of pre- and post-judgment interest according to proof;

An award of attorneys ' fees and costs and other expenses according to

proof; and

351209. KALEIDESCAPE , INC. ' S CROSS- COMPLAINT
Case No. 1 04 CV 031829
---

Such other and further relief as this Court deems just and proper.

DATED: June 1 2005 KEKER & V AN NEST , LLP

BY:
DARALYN J. DURIE

Attorneys for Defendant
KALEIDESCAPE , INC.

24 .

351209. KALEIDESCAPE , INC. S CROSS- COMPLAINT
Case No. 1 04 CV 031829