A federal court judge issued a preliminary injunction Monday that orders the online DVD-streaming streaming service Zediva to shut down, finding that the service is infringing on Hollywood’s rights and that its continuing service threatens the studios’ attempt to build a video-on-demand market.

Zediva’s service lets users watch recently released DVDs over the internet for $2, by renting out a DVD and a DVD player (installed in Zediva’s server rooms) that is controlled by a customer’s computer. The service had its public debut in March, and was sued by the studios in April.

U..S. District Court Judge John Walter issued a preliminary injunction against Zediva on Monday, writing that “As the copyright holders, Plaintiffs have the exclusive right to decide when, where, to whom, and for how much they will authorize transmission of their Copyrighted Works to the public.”

Zediva argues that it’s more like a traditional video rental store like Blockbuster, which needs no licensing agreement to rent movies, than a video-on-demand service like Netflix, which must sign deals to stream movies to subscribers. Zediva can only rent out DVDs to one customer at a time, and makes no copies of the DVDs.

That, Zediva argued, meant that Zediva wasn’t performing the work to the public, just to individuals.

But Judge Walter of the U.S. Federal District Court Central California District made clear which side of the “Is Zediva Legal” argument he was on, interpreting copyright law to mean that any streaming service was just like a movie theater – and needs to have permission of the copyright holder.

In addition, Defendants’ transmissions are “to the public” for purposes of the transmission
clause. Customers watching one of Plaintiffs’ Copyrighted Works on their computer through Zediva’s system are not necessarily watching it in a “public place,”"but those customers are nonetheless members of “the public.”

Walter’s injunction adds Zediva to a long list of technology startups, including Napster, Grokster, ivi.tv, MP3.com, and Seeqpod, among dozens of others, that have been shuttered or ordered shut down due to copyright litigation.

In a statement, Zediva vowed to fight the ruling and said it is working with the MPAA to set a schedule for a shutdown of its service.

Today’s ruling represents a setback for the hundreds of thousands of consumers looking for an alternative to Hollywood-controlled online movie services. Zediva intends to appeal, and will keep fighting for consumers’ right to watch a DVD they’ve rented, whether that rental is at the corner store or by mail or over the Internet.

The MPAA’s statement from associate general counsel Dan Robbins (.pdf) struck a different note:

Judge Walter’s decision is a great victory for the more than two million American men and women whose livelihoods depend on a thriving film and television industry. Judge Walter rejected Zediva’s argument that it was „renting? movies to its users, and ruled, by contrast, that Zediva violated the studios’ exclusive rights to publicly perform their movies, such as through authorized video-on-demand services.

The parties have to agree on a shutdown plan by August 10, and the suit will continue — though the ruling indicates that Walter is likely to eventually rule for the studios, which are seeking damages both from Zediva and its founder Venkatesh Srinivasan.

The 12-page injunction took issue with nearly every argument Zediva made in its defense, and even went further, arguing that since Zediva’s users could occasionally encounter movies that were “out of stock,” consumers would be confused about how streaming video services work, potentially ruining the market for Hollywood.

Oddly, Martin also argued that Zediva’s service, which charges per movie, could cause “confusion or doubt regarding whether payment is required for access to the Copyrighted Works.”

Zediva’s options at this point include fighting the suit in court, or appealing the injunction to the Ninth U.S. Circuit Court of Appeals.

Photo: A bank of DVD players in Zediva’s server farm. Credit: Court filing by Zediva.