Aereo’s Next Chapter in Bankruptcy
On the heels of a business-crushing Supreme Court decision, television-streaming giant Aereo announced in November that it would be filing for Chapter 11 bankruptcy. Founded in 2012 with nearly $100 million in venture funding, the company allowed users to live-stream 30 different television channels for a low monthly subscription fee. Aereo accessed these networks through its own micro antennas, which pulled the signals necessary for re-broadcasting from the television channels’ nearby towers.
The parent companies of the effected networks – ABC, CBS, NBC, and Fox – initiated a civil suit in the Southern District of New York in 2012. The broadcasters alleged that Aereo violated federal copyright law by failing to pay retransmission fees, which generate a significant portion of the networks’ revenues. In response, Aereo argued that its technology is no different from a TV antenna on an individual user’s roof that connects to the TV through a wire; here, the wire connecting the antenna with the TV is the internet.
The Copyright Law of 1976 provides a copyright holder with the exclusive right to “perform the copyrighted work publicly.” In other words, the copyright holder is the only body permitted to “transmit or otherwise communicate a performance or display of the work . . . to the public, by means of any device or process . . .” As the networks note in their briefs, Congress enacted this provision in order to “bring within the scope of the public performance right” the retransmission of television broadcasts – ultimately, to protect the networks’ content.
In the early stages of the litigation, it looked as though Aereo might prevail. The District Court ruled in Aereo’s favor, first denying the broadcasters’ request for a preliminary injunction and later denying their motion for summary judgment. The Second Circuit then affirmed the lower court’s rulings, relying on Aereo’s technological make-up in its decision. The Second Circuit reasoned that Aereo did not violate the federal copyright law because each customer viewed a unique copy of a broadcast, obtained through that customer’s specific micro antenna. In this way, Aereo was engaged in thousands of “private” performances rather than the prohibited “public” ones.
The broadcast networks filed their petition for writ of certiorari in October 2013, asking the Supreme Court to decide whether a “company ‘publicly performs’ a copyrighted television program when it retransmits a broadcast of that program to thousands of paid subscribers over the Internet.” Aereo also urged the Supreme Court to take the case. The company reasoned that, as its business grew, one wide-reaching decision would be better than a variety of different rulings throughout the country. The Supreme Court swiftly decided to take up the issue in January 2014 and held oral arguments in April.
On June 25, 2014, the Supreme Court reversed the Second Circuit’s ruling and held 6-3 that Aereo violated the Copyright Act’s Transmit Clause because it “publicly perform[ed]” the networks’ copyrighted works. The Court found that Aereo was doing more than acting as the “wire” that connects the antenna to the television; it was functioning “substantially similar[ly]” to a cable system and, thus, needed to obtain the networks’ permission to transmit their content. The majority decision was delivered by Justice Breyer, joined by Justices Ginsburg, Kagan, Kennedy, Roberts, and Sotomayor. Justices Alito and Thomas joined Justice Scalia in his dissent.
“Viewed in terms of Congress’ regulatory objectives, these behind-the-scenes technological differences do not distinguish Aereo’s system from cable systems, which do perform publicly,” the decision reads. “Congress would as much have intended to protect a copyright holder from the unlicensed activities of Aereo as from those of cable companies.” In the same breath, the Court took care to note that this ruling was specific to Aereo and should not impact other emerging technologies.
In a statement following the ruling, Aereo’s CEO Chet Kanojia lamented that the Court’s ruling is a “massive setback for the American consumer” and that it sends a “chilling message to the technology industry.” He explained that Aereo “worked diligently to create a technology that complies with the law,” but, unfortunately, the Court’s ruling made it clear that “how the technology works does not matter.” On the other hand, the CEO of the National Association of Broadcasters, Gordon Smith, explained that he was “pleased” that the Court upheld the idea of copyright protection that is “enshrined in the Constitution” by siding with the television channels. He sees Aereo’s argument that the broadcasters were simply attacking its innovation as “demonstrably false.”
Three days after the Supreme Court decision, Aereo suspended its streaming service. Meanwhile, broadcasters such as CBS have moved forward with plans to allow consumers to live-stream programs on the internet.
As Aereo CEO Kanojia explained in the company’s Chapter 11 announcement (aptly titled “The Next Chapter”), the June Supreme Court decision “effectively changed the laws that had governed Aereo’s technology, creating regulatory and legal uncertainty.” Despite Aereo’s best efforts at circumventing this decision, “the challenges have proven too difficult to overcome.” The CEO expects that Chapter 11 will allow Aereo to “maximize the value of its business” without the expense of protracted litigation.
When businesses are unable to service their debt, Chapter 11 permits them to undergo reorganization under Title 11 of the U.S. Bankruptcy Code. Unlike in Chapter 7 where businesses cease operations, Chapter 11 debtors usually remain in control of their operations under the supervision of the court. Companies have several mechanisms at their disposal as part of the restructuring process, including acquiring loans with favorable terms and canceling existing contracts. Most importantly in the case of Aereo, companies who file for Chapter 11 bankruptcy benefit from an automatic stay, which halts pending litigation and prevents creditors from attempting to collect on their debts.
Aereo appointed Lawton Bloom of Argus to serve as the Chief Restructuring Officer, responsible for guiding the company through liquidation or restructuring. The company has already laid off 74 employees, leaving just 14. In its papers filed with the court, Aereo claimed to have approximately $20.5 million of assets and to owe about $4.2 million of debts. Aereo’s CFO Ramon Rivera explained that using Chapter 11 to gain protection from creditors would provide the “necessary breathing room” for Aereo to plot out next steps.