Streaming, bitstreams and patent exhaustion: when VDP licensing demands go too far

Following on from our previous discussions regarding the recent disputes over video coding patents, including the Unified Patent Court (UPC) Local Division Mannheim decision in InterDigital v. Disney, we now shift our focus to a second highly-debated issue: the use of encoded video data as bitstreams by commercial streaming services.

Setting aside mere distribution-related patents concerning DASH, HLS and rate adaptation technologies involving on-the-fly-transcoding, we will focus on patent claims directed to the syntax and codec as such. These constitute the major share of patents in Video Distribution Provider (VDP) pools. The core legal question is: What specific acts of use form the basis for a VDP licensing demand against commercial streaming services?

Given our specialised focus on German and UPCA law, our analysis is naturally limited to these specific legal jurisdictions. In light of the harmonised patent law in Europe, it is possible that the legal situation may be quite similar throughout Europe or vary only in nuances. It is, however, important to keep in mind that other jurisdictions may have a different perspective on the legal assessment of the legal questions raised.

The technical starting point: the video data pipeline

To set the scene, we are illustrating the whole process from the raw picture to the customers' watching device, be it a smartphone, PC monitor, tablet or traditional TV. There may be other steps in between, or left out, but essentially this can be seen as a basic pipeline which applies to the video data delivered by the major streaming services:

Step 1: Capture & ingest (the camera sensor): Raw optical data. Photons hit the camera sensor (CMOS/CCD), converting light into electrical signals. This raw digital data is captured in massive, uncompressed formats (like ProRes RAW or ARRIRAW) to preserve maximum colour depth and dynamic range. A single minute can easily exceed 10 to 20 GB.

Step 2: The master edit (mezzanine file): Production phase. The raw footage is edited, colour-graded and mixed. The final output from the studio is exported as a high-quality mezzanine file (or master file), typically using codecs like ProRes 422 HQ or DNxHR. This file is visually lossless but still massive, acting as the source material sent to the streaming service.

Step 3: Encoding & transcoding: Enter codecs like HEVC. The streaming platform inputs the mezzanine file into an encoding pipeline. Here, video codecs like HEVC (H.265), AVC (H.264) or AV1 radically compress the data. HEVC uses advanced techniques like spatial/temporal prediction and variable block sizes (up to 64x64 pixels) to shrink the data by up to 50% more than AVC at the same visual quality. The file is transcoded into an encoding ladder, multiple versions ranging from 480p at low bitrates to 4K at high bitrates.

Step 4: Packaging & segmentation: Preparing for streaming protocols. The compressed video streams cannot just be sent as one massive file. Packaging engines cut the video files into tiny, self-contained temporal chunks (typically 2 to 6 seconds long). These chunks are wrapped into streaming protocols like DASH (Dynamic Adaptive Streaming over HTTP) or HLS (HTTP Live Streaming). The packager also generates a manifest file (.m3u8 or .mpd), which acts as a master index map telling the player where to find every chunk and every quality level.

Step 5: Distribution (CDN): Edge Caching. The packaged segments and manifest files are pushed to a Content Delivery Network (CDN). Instead of every subscriber downloading from the streaming service's central origin server, the data is cached on thousands of edge servers distributed globally. The data sits at the network edge, physically closer to the subscriber.

Step 6: Transmission & last-mile delivery: Adaptive Bitrate (ABR). When a subscriber hits "Play," their device requests the manifest file. The video player reads the index and requests the first few segments. Using Adaptive Bitrate Streaming (ABR), the player constantly monitors the user's real-mile bandwidth. If network speeds drop, the player seamlessly requests the next 2-second segment from a lower rung of the HEVC encoding ladder to prevent buffering.

Step 7: Decoding & rendering: Client-Side Display. The subscriber's device (Smart TV, phone, laptop) receives the network packets. The device's hardware decoder (specifically designed to unpack HEVC or AV1 bitstreams efficiently without overheating the CPU) reconstructs the compressed data back into uncompressed RGB/YUV pixel arrays. The display panel flashes these frames sequentially and the viewer sees seamless video.

Identifying acts of use: a legal assessment of each step 

Which of these specific steps establishes an act of infringement under patent law?

Step 3 (encoding): Encoding the mezzanine file is obviously direct use of encoder claims. Under section 9 no. 2 German Patent Act (PatG) and Art. 25(b) UPCA, the execution of the claimed encoding method constitutes direct infringement.

Step 4 (packaging & segmentation): The packaging and segmentation of the compressed video is a mere reproduction of an encoded stream. Because this step does not execute the technical steps of the claimed coding method, it does not qualify as direct use under section 9 no. 2 German Patent Act (PatG) or Art. 25(b) UPCA.

Step 5 (distribution): Commercial distribution of the data is not direct execution of the encoding method, but this is where derivative product protection kicks in. Under section 9 no. 3 German Patent Act (PatG) and Art. 25(c) UPCA, a patent's protection extends to the product directly obtained by a patented method. The UPC Local Division Mannheim confirmed in InterDigital v. Disney that an intangible sequence of signals (an encoded bitstream) constitutes a "product" within the meaning of Art. 25(a) and (c) UPCA, regardless of whether it is on a physical data carrier (like a DVD or Blu-Ray Disk). The German Federal Court of Justice (BGH) established the same principle in its MPEG-2-Videosignalcodierung decision, ruling that an encoded data sequence is the direct product of an encoding method. Therefore, distributing encoded bitstreams is reserved commercial use unless there is consent to use the encoding method and distribute the encoded data.

Step 6 (transmission & last-mile delivery): Does delivering the stream constitute independent use of the product of a claimed encoding method? While copyright law often grapples with specific exemptions for ephemeral reproductions during mere transmission, patent law contains no such explicit carve-out. However, the mere duplication of an encoded stream during transmission and last-mile delivery does not execute the claimed coding method again. Also, storing the data on edge computers or routers adds no additional act of using the claimed encoding method.

Step 7 (decoding & rendering): Decoding an encoded bitstream is obviously not direct use of an encoding claim. Can streaming platforms be held liable for indirect (contributory) infringement of decoder claims under section 10 German Patent Act (PatG) or Art. 26 UPCA because they supply the data for encoding? The end-user's act of decoding does not fall under the private, non-commercial use exemption for indirect use (section 11 no. 1 German Patent Act (PatG), Art. 27(a) UPCA) because the back exemption under section 10(3) German Patent Act (PatG), Art. 26(3) UPCA excludes private use for a scenario where the streaming provider acts commercially without the consent of the patentee. However, the legal threshold for indirect infringement requires supplying a "means relating to an essential element of the invention". The German Federal Court of Justice's MPEG-2 decision explicitly clarified that an encoded bitstream does not meet this threshold. The stream is merely the object to be processed by the claimed decoding method (the raw material), not a functional tool that puts the decoding method into practice.

Intermediate result

Decoder claims do not necessarily need to be licensed by streaming services. This may already reduce the number of patents to be licensed significantly. Many patents, however, include both, so removing decoder claims may not cause a collapse of the VDP portfolio size.

Encoder claims need to be licensed since the distribution of encoded video data can be considered commercialisation of a product of the claimed encoding method that is reserved for the patentee. As shown in our earlier blog, these claims are encumbered by the patentee's FRAND declarations, where the codec and syntax as such are covered by the encoder claim meaning that FRAND licensing obligations apply.

Derivative protection ends with consent: the licensed encoder

Derivative protection of the encoded bitstream is not absolute; it ends where the patentee has consented to use of the claimed encoding method and distribution of the encoded stream. If the encoding process itself is licensed, patent exhaustion usually applies to the derivative protection of the resulting encoded bitstream. As established by the German Federal Court of Justice in its MPEG-2 decision, once a data sequence (such as a master file) is generated with the patentee's consent, the creation of further copies, whether on physical data carriers like DVDs or as temporal stream chunks, and their subsequent distribution, fall strictly within the exhausted right to the intended use of the generated data. Crucially, patent law does not inherently limit the "number of products" (or streams) that can be produced with the consent to the claimed method; any such restriction is entirely a matter of contract between the parties.

Moreover, aside a special agreement with the buyer of a licensed product suitable for executing patented methods, the execution of the patented methods generally is implicitly licensed together with the product, according to settled German case law. 

The cellular network analogy

This legal mechanism is nothing other than what we see in cellular network technology. In telecommunications, an eNodeB (base station) is usually licensed under method claims concerning the generation of the radio signal, attachment and hand-over methods, scheduling and so on. The subsequent radio transmission to the User Equipment (UE) is covered, as far as we are aware, by that base station licence as well. We are not aware of subscriber-dependent patent licences in cellular communications. Mere hardware licences cover the equipment and all connections that make use of a claimed method executed on the licensed hardware are licensed alongside it. While this may change in the future, new radio access technologies are distributed and configured in software, potentially serving as an anchor to establish new licensing models, the current hardware-based exhaustion principles remain a massive hurdle for downstream licensing demands.

Escaping VDP pool demands: Can streamers just buy a licensed encoder?

This raises a critical practical question: Can streaming services simply go out and buy or use a licensed professional encoder to avoid VDP pool demands in respect of SEP codec claims?

Practice has provided access to some licence agreements suggesting that professional encoder licences have generally been available. However, major patent pools are actively adapting their licensing conditions to capture this exact scenario and exclude this type of licence for commercial HEVC products which are designed or marketed primarily for use for encoding video and intended for commercial distribution, where a back exemption applies to video image recording/capture devices like cameras and camcorders (see here: https://accessadvance.com/topic-what-do-we-license/). 

A public list of licensees, however, shows major producers of professional video equipment, which can be considered licensed on both the encoder and decoder side, where the equipment is capable of producing HEVC encoded bitstreams. The million-dollar question for industry is: Does this mean these products are not fully licensed when any of the licensed products are used in the video data pipeline of a streaming service for encoding the video data? Attempting to carve out downstream commercial streaming from an upstream equipment licence creates immense tension with traditional exhaustion doctrines.

The grey area: streaming from licensed consumer HEVC products and use of licensed video editing software

A significant grey area remains regarding streaming based on licensed consumer HEVC products and where licensed video editing software with HEVC export function is used. Consider a creator who uses a digital camera and video editing software (sometimes even sold as a bundle) or a computer sold with pre-installed video editing software of a licensed manufacturer that outputs HEVC-encoded content.

Unless transcoding or the preparation of a new encoding ladder takes place at the (unlicensed) streaming service platform, such video data may be streamed via larger video distribution providers without the need for additional licensing. Because the initial encoding was legitimately licensed at the camera and editing software level, demanding a patent licence from the platform distributing those exact bitstreams is hard to justify. While it depends on each individual case, specifically whether the platform modifies the stream, demanding a mere subscription-based patent licence from the platform for distributing an exhausted bitstream finds no solid basis in German or UPCA law.

Conclusion

The right approach to assessing VDP licensing demands is therefore a differentiated one:

Yes, encoding a mezzanine file is direct use of encoder claims.

Yes, distributing an encoded bitstream is reserved commercial use under derivative product protection, if the initial encoding was unlicensed.

No, streaming platforms do not indirectly infringe decoder claims simply by transmitting the stream to users.

No, patent pools cannot easily ignore patent exhaustion if the underlying encoder used in the pipeline is already fully licensed.