Digital TV provider sues rival for piracy

Filed in a U.S. court in the Northern District of California, the suit claims the action caused damage in excess of $1 billion to Canal+ Group, a division of entertainment giant Vivendi Universal, when pirates used the information to flood the market with counterfeit smart cards that allowed digital TV subscribers to garner free services.

"This is way beyond competitive intelligence," Francois Carayol, CEO of Canal+ Technologies, the Cupertino, Calif.-based subsidiary of Canal+ Group, said in a conference call Tuesday. "We are talking about an organized activity aimed to hurt our business."

Canal+ Group and NDS, a subsidiary of media behemoth News Corp., create the software and security that enable digital TV providers to charge subscribers for access to special programming, such as pay-per-view movies and premium services. The security of their systems is extremely important as it helps customers prevent subscriber piracy.

In a statement, NDS called the lawsuit "outrageous and baseless." It stressed the company's commitment to eradicating piracy that hurts the digital cable and satellite industries.

"That problem is due solely to the inferior nature of Canal+'s conditional access technology, the failure of its business plan to contain measures to protect against piracy, and its failure to deal with piracy once it began," Abe Peled, CEO of the U.K. company, said in a statement. "The clear evidence is that the pirate community targeted Canal+ early in 1998 and succeeded without any help from anyone, particularly NDS."

Canal+ Group tells a different story.

In late 1998, the company alleges, NDS obtained copies of the company's smart cards and sent them to a lab in Israel, where hardware and software engineers used advanced machinery to strip away the physical security and reveal the programming and circuitry of the devices.

"They used chemical washes and focused ion-beam etching to expose the circuits," Carayol alleged.

Normally, such machinery is used in the research and manufacture of semiconductor chips. By essentially reversing the manufacturing process, engineers could then figure out how to build a system that mimicked the security of Canal+ Group's smart cards.

In March 1999, detailed information about the French company's cards appeared on the Internet, enabling established pirate organizations to more easily create counterfeit cards, Carayol alleges. As a direct result of the posting of the information to the Internet, counterfeit cards "flooded the market" in 2000, he added.

For Canal+ Group, it has been a running battle to keep ahead of the pirates.

"On the ground, we collect counterfeit cards and we analyze them," he said. "We have developed a new generation of smart cards, which we intend to start deploying...in the next month. That's why it is so important that the illegal activities are stopped."

Carayol said the fight against pirates--teamed with potential lost revenue--has cost the company at least $1 billion.

In a statement, NDS said it hadn't yet seen the complaint. The company plans to file a counterclaim after it studies the details of Canal+ Group's suit.

Rather than the victim of underhanded competition, Canal+ Group is suing to gain a competitive advantage, NDS said in a statement, adding that the French company has admitted to reverse engineering its competitors' cards as well.

"All smart cards can be hacked if left in the field long enough, which is why NDS's business plan calls for periodic replacement of cards," said NDS's Peled. "NDS also designs its system to permit electronic counter measures to be sent over the air to disable counterfeit cards. Canal+'s card has not provided effective counter measures."

The suit, by a relatively minor player in the U.S. market, may not make it to court, said Richard Doherty, director of research for technology assessment firm Envisioneering Group.

"Is it designed to go to court, or it is designed to bring someone to the table?" he asked. "We believe they might want to have a dialogue with NDS and reach some concessions." NDS is the primary provider of conditional technology to almost 10 million DirecTV set-top boxes.

Doherty added that it didn't come as a surprise that the French company sued in a U.S. court rather than in European one.

"The U.S. has the Digital Millennium Copyright Act and Europe does not," he said, referring to a federal law that has become Hollywood's primary cudgel against digital piracy. "And it's easier to bring a lawsuit here."