"capital" Punishment: Evaluating an Investor's Secondary Copyright Infringement Liability After Veoh

• Citation: Vol. 6 No. 3
• Publication year: 2011

Washington Journal of Law, Technology and Arts Volume 6, Issue 3 Winter 2011

"Capital" Punishment: Evaluating AN Investor's Secondary Copyright Infringement Liability AFTER Veoh

James L. Proctor, Jr.(fn*)

Abstract

In UMG Recordings, Inc. v. Veoh Networks, Inc., the U.S. District Court for the Central District of California considered claims that investors in a privately-held corporation were secondarily liable for copyright infringement. The Veoh court findings, which set out current secondary copyright infringement law, provide guidance for investors by clarifying their potential liability for copyright infringement committed by the company in which they invested. However, because the decision was fact-specific, this guidance is incomplete. For example, the court found that the investor neither controlled the infringing activities nor reaped direct financial benefit from them. This leaves open for further decisions the situation in which only one factor is present. In addition, Veoh bases secondary liability on such subjective concepts as "control," "supervision," "ability to supervise," "reason to know," "material assistance," "encouragement to infringe," and "direct financial interest." Therefore, future cases involving similar facts are susceptible to contraryresults based on the court's interpretation of these concepts. This Article examines the standards established and the cases distinguished by the Veoh court to determine conditions under which an investor may be held liable for the copyright infringement of the investment target and proposes practical steps to minimize liability exposure.

Table of Contents

Introduction .................................................................................. 218

I. Contributory and Vicarious Copyright Infringement under Veoh ............................................................................. 220

II. Contributory Liability Requires Action to Effect Infringement ......................................................................... 221

III. Vicarious Liability Requires Direct Financial Interest and Operational Control ....................................................... 223

IV. Infringement Liability Requires Inducement via Product Distribution .............................................................. 227

V. Impact of Veoh: Investors Not Per Se Liable, but

Due Diligence Still Essential ................................................ 229

Conclusion ................................................................................... 231

Practice Pointers ........................................................................... 231

Introduction

With the rapid emergence of Internet-based technologies, investors increasingly seek guidance regarding potential secondary liability for copyright infringement. Penalties for secondary infringement can be high, ranging from an injunction against the infringing conduct to an award of damages. Attorney's fees are routinely awarded to successful plaintiffs. Moreover, with respect to start-up companies, investors may have deeper pockets that claimants can pursue for recovery.

Statutory coverage related to the rights of copyright holders is limited to protection against direct infringement.(fn1) However, this lack of statutory coverage does not preclude the imposition of secondary liability.(fn2) To account for parties who indirectly benefit from copyright infringement, courts have developed concepts of secondary liability.(fn3) Nevertheless, they have provided this guidance piecemeal, reflecting the challenge of maintaining the correct balance between copyright holders' rights and the encouragement of commerce. As the Supreme Court noted in MGM v. Grokster, "the more artistic protection is favored, the more technological innovation may be discouraged; the administration of copyright law is an exercise in managing the tradeoff."(fn4)

In February 2009, the United States District Court for the Central District of California provided some direction for investors in UMG Recordings, Inc. v. Veoh Networks, Inc.(fn5) The federal district court considered claims of contributory, vicarious, and inducement liability against investors in an Internet company providing services used to infringe copyrights.(fn6) The court, in dismissing the case, found, under the facts as pled, that the investor defendants did not exercise sufficient control over the infringing activity to be held liable for contributory infringement(fn7) and lacked a sufficient financial interest tied to the infringement to be held liable for vicarious infringement.(fn8) The court also found that the defendants did not encourage the direct infringement in a manner to be held liable for inducement to infringe.(fn9)

This Article examines Veoh's analysis of investor liability in light of the then-existing state of secondary copyright infringement law, and provides practical suggestions for potential investors in companies providing products or services that customers could use to infringe copyrights.

I. Contributory and Vicarious Copyright Infringement under Veoh

In September 2007, Universal Music Group, Inc. ("UMG"), a major record company, filed suit in federal court against Veoh Networks, Inc. ("Veoh"). In its initial complaint, UMG claimed that Veoh was liable for direct, contributory and vicarious copyright infringement, and for inducement of copyright infringement. The ground for this claim was that Veoh allowed customers to upload copyright-protected video files via its Internet-based video network.(fn10) UMG later made secondary liability claims against Veoh's investors, who were also shareholders and collectively controlled a majority of Veoh's board seats, for facilitating this infringing technology by providing financial and management support.(fn11)

The court granted the investor defendants' motion to dismiss the case.(fn12) In doing so, the court held that, based on the facts pled by plaintiff, the investors did not provide sufficient material assistance to support a claim of contributory copyright infringement.(fn13) The court also found that the investors lacked sufficient financial interest in the infringing activities to support a claim of vicarious copyright infringement.(fn14) The district court distinguished several cases that previously set the boundaries of secondary copyright infringement liability. The court provided UMG an opportunity to amend its complaint, although it discouraged it from doing so, in part, because the claims could raise "vexing issues of corporate governance."(fn15) UMG amended the complaint, but the district court dismissed it with prejudice.(fn16) The district court's dismissal of the claims in Veoh is on appeal to the Ninth Circuit and a decision is expected within the year.(fn17)

The liability boundaries for investors in companies found to have infringed copyrights will almost certainly continue to develop. However, at least for the time being, the Veoh analysis may be instructive for those seeking to predict future developments in secondary copyright infringement liability.

II. Contributory Liability Requires Action to Effect Infringement

In Veoh, the subscribers allegedly committed direct copyright infringement by uploading copyrighted television shows onto the Veoh network. Veoh itself was sued for contributory infringement but successfully asserted that it was protected by section 512(c) of the Digital Millennium Copyright Act.(fn18)

"The theory of contributory liability generally permits direct action against those who aid and abet the offender in his infringing activities."(fn19) These principals need not necessarily exercise dominion over the primary tortfeasor...