This article does not give the legal basis for the decision, but I believe the issue is that while an individual can do whatever he or she wants to a copy of a film (e.g., a DVD), creating a derivative work that is not further distributed and not used for commercial purposes, someone cannot make derivative works and then distribute them for commercial purposes (for example) without permission of the copyright owner.
I believe the VidAngel service, unable to obtain permission from the copyright owners of the films (the studios), operates on the premise that as a customer I buy a copy of a film from VidAngel, own that copy, and. when I have VidAngel stream the film to me and apply filters and thereby create a derivative work, I am doing so by having VidAngel act as my agent. The studios probably challenge that premise as being a fiction on a number of grounds, one reason being that like the overwhelming majority of VidAngel customers I immediately “sell” my copy of the film back to VidAngel within 24 hours of watching it.
I am sure this is not the end of the story, there are factual and legal arguments VidAngel will certainly make.
It will be interesting to see where this goes.
I added to my earlier post that as a customer of VidAngel I am also having VidAngel stream the film to me. The studios probably object to that fundamental aspect of the business model as well, apart from the filtering. When I have some time I need to go take a look at some articles on this, I am sure there will be some interesting coverage.
This article from Variety does indicate that the studios object to the very act of streaming itself: http://variety.com/2016/biz/news/vidangel-copyright-lawsuit-star-wars-1201797913/.
The article also sheds light on another aspect of VidAngel’s business model. It seems VidAngel requires me to apply at least some filters when I watch a film. This is probably an effort to argue that VidAngel falls under the Family Movie Act of 2005.