shareIt’s legal to let a friend borrow a DVD from your personal collection. But what if you upload that same movie to the Web and let your friend stream it?

That’s the legal gray area explored by Stream Nation, a service allowing users to upload the movies they own, whether they’re on DVDs or hard drives, to one central hub so they can be streamed on any device. The kicker is, users can also let a friend “borrow” one of their movies for 24 hours. Stream Nation’s Jonathan Benassaya explained the service, which is still in invite-only beta, to PandoDaily’s Kym McNicholas at last week’s LAUNCH Festival.

When asked about the legality of the service, Benassaya provided a classic Silicon Valley-an response: “This is where innovation is. When Uber started, they were (almost) shut down by San Francisco because it was kind of illegal.”

But it’s one thing for companies like Uber and Airbnb to challenge local laws, described by AngelList’s Naval Ravikant as “fungible” and subject-to-change at a recent PandoMonthly event. It’s something else entirely to scoff at federal intellectual property laws, which are much more rigid. Unless you want to end up like Napster, Ravikant warned, it’s better to try to change the law through lobbying efforts than to break it willfully and hope for the best.

Benassaya maintains that the service is no less legal than letting a friend borrow a DVD of Pulp Fiction, as long as the DVD was legally obtained in the first place. “We are just replicating the physical life in digital.” But would that claim hold up in court?

Maybe. Evan Brown, a Chicago attorney who writes about law and technology at the blog internetcases, says Stream Nation’s best legal argument is that its service is a form of what he calls “space-shifting.”

“Time-shifting is a protected fair use going all the way back to 1984 when the Supreme Court essentially validated VCR technology,” Brown said. In other words, if you legally obtain a movie, you have the right to make a copy of it, either to back it up or to watch it on multiple devices. That’s the legal justification for services like Apple’s iCloud and Amazon’s Cloud Player, Brown says. But Stream Nation takes these so-called “locker services” to another level by letting others stream what is uploaded. Granted, this feature has some key restrictions: The stream is only available for 24 hours, and during that period only one friend can access it. But as Brown puts it, this “flies in the face of norms that are embodied in the user agreements for Amazon’s Cloud Player and Apple’s iCloud.”

For example, iCloud’s terms of service stipulates that users “should not share [their] Account and/or password details with another individual.” It also requires users to agree not to “reproduce, copy, duplicate, sell, resell, rent or trade the Service (or any part thereof) for any purpose.” Yes, this is just one company’s terms of service. But in this brave new world of copyright enforcement, the norms embraced by the industry’s biggest players can go a long way in shaping de facto practices that haven’t yet been tested in courts.

Unfortunately, the legal risks surrounding Stream Nation have practically become a cost-of-doing-business for companies in the content-sharing business. No matter how hard you’ve thought about your legal defense, a company like Stream Nation is rarely 100% safe from litigation, particularly when claiming “fair use” (for a more detailed explanation of the types of copyright use, watch our music video). All a copyright owner has to do to obliterate a fair use defense in court is prove that it lost money due to the actions of an accused infringer. And because Stream Nation’s platform encourages users to share copyrighted materials with others, no matter what restrictions are in place, the company could find itself on the wrong end of a lawsuit.

The one thing Stream Nation does have on its side is common sense. If I pay for a piece of content, I should be able to do whatever I want with it as long as I’m not making money off it. That said, maybe the only reason it’s legal to let friends borrow DVDs and CDs in real-life is that big media companies never had a way to stop it. But now that almost all of our purchases and transactions leave a digital fingerprint, that’s all changed.

[Image courtesy Niklas Wikström]