UMG Recordings, Inc., et al. v. Veoh Networks Inc. et al., Case nos. 09-55902, 09-56777, & 10-55732 (9th Cir. Mar. 2013)

http://cdn.ca9.uscourts.gov/datastore/opinions/2013/03/14/09-55902.pdf

The Ninth Circuit ruled that the safe harbor of the Digital Millennium Copyright Act, 17 U.S.C. §512(c), protects video-sharing site Veoh Networks from copyright infringement claims by music producer Universal Music Group based on site users’ sharing of music videos containing UMG’s copyrighted songs. The court had previously ruled in favor of Veoh. After the Second Circuit set forth a somewhat different interpretation of the DMCA's safe harbor in a case last year involving YouTube, the Ninth Circuit withdrew its earlier decision (at 667 F.3d 1022 (9th Cir. 2011)) and agreed to rehear the case. Notably, given the prominence of the two circuits regarding DMCA and other copyright issues, the Ninth Circuit adopted much of the reasoning of the Second Circuit.

Veoh’s system allows users, free of charge, to share video content over the web. (Veoh earns revenue via ads.) As of April 2009, users had up-loaded over 4 million videos. Veoh had adopted procedures to prevent infringement, such as terms of use that included promises the user was not violating copyrights and had the right to up-load the video, and a warning at the commencement of loading not to up-load copyrighted material. Also, Veoh had employed technologies to limit copyright infringement, including using ‘hash-filter’ software, ‘fingerprinting’ works provided by copyright owners, and barring repeat offenders from the site. But except for checking for pornographic videos, the court found, Veoh’s employees do not review the user-submitted videos or accompanying information such as metadata before the video is made available. Users have been able, without Veoh’s authorization, to download videos containing songs for which UMG owns the copyright.

In 2007, UMG sued Veoh for direct, vicarious and contributory infringement, and UMG later sued three investors in Veoh. The district court granted summary judgment to Veoh (and dismissed the claims against the investors), finding it was protected by the DMCA’s safe harbor, limiting service providers’ liability for “infringement of copyright by reason of the storage at the direction of a user of material that resides on a system or network controlled or operated by or for the service provider….” 17 U.S.C. §512(c)(1).

In affirming summary judgment in favor of Veoh, the court rejected several narrow interpretations of the safe harbor proffered by UMG and adopted some of the analysis of these issues by the Second Circuit last year in Viacom Int’l v. YouTube, Inc., 676 F.3d 19 (2d Cir. 2012).

The decision addressed two of the three statutory prerequisites to the safe harbor. To paraphrase, the safe harbor provides, at 17 U.S.C. §512(c)(1), that a service provider generally shall not be liable for copyright infringement “by reason of the storage at the direction of a user of material that resides on a system or network controlled or operated by or for the service provider,” if the service provider:

(A)(i) does not have actual knowledge that the material or an activity using the material on the system or network is infringing;

(ii) absent such actual knowledge, is not aware of facts or circumstances from which infringing activity is apparent; or

(iii) upon obtaining such knowledge or awareness, acts expeditiously to remove, or disable access to, the material;

(B) does not receive a financial benefit directly attributable to the infringing activity, where the service provider has the right and ability to control such activity; and

(C) upon receiving sufficient notice of claimed infringement from the copyright, expeditiously removes or disables access to the material that is claimed to be infringing.

Regarding the threshold requirement that the infringement be “by reason of the storage at the direction of a user,” the court rejected as too narrow UMG’s argument that this means that the infringing conduct be the storage. The court rejected UMG’s argument that the “by reason of” language should be construed consistent with the RICO statute, noting, inter alia, that the DMCA is a narrow affirmative defense rather than an expansion of liability like RICO. The court noted that the statute presupposes that service providers will provide access to users’ stored material. “[W]e would thus contravene the statute if we held that such access disqualified the providers from the safe harbor.” The court also rejected UMG’s argument that Section 512(c) protects only web-hosting services.

As for the requirement in subpart A of the statute that the service provider lack actual or sufficient constructive knowledge of unremedied infringements, the court (a) found that UMG had failed to rebut Veoh’s proof that, when it did actually learn of infringements, it removed them and (b) ruled that UMG’s interpretation of the awareness prong of subpart A(ii), called ‘red flag’ awareness, was too broad. UMG argued that the safe harbor should not be available to Veoh because it ‘must have known’ it was infringing based on the nature of its site. The court found that argument to be factually incorrect (noting that one major holder of music copyrights, Sony, had authorized Veoh to post videos), and inconsistent with the statutory scheme. The court took guidance from the Supreme Court’s interpretation of secondary infringement liability in Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417 (1984), in which the Court held that a maker of a device that was capable of substantial non-infringing uses was not liable for secondary infringement. Congress put the burden on the copyright owners to notify service providers of infringements, the court noted, and the statute excludes evidence of notices that do not meet the statutory requirements, a scheme inconsistent with a ‘must have known’ standard.

While the court agreed with the Second Circuit’s decision in Viacom that a service provider cannot willfully bury its head in the sand to avoid obtaining specific knowledge, “Veoh’s general knowledge that it hosted copyrightable material and that its services could be used for infringement is insufficient to constitute a red flag.”

Rejecting UMG’s reliance on news reports and related evidence of knowledge, the court held that, “[i]f Veoh’s CEO’s acknowledgment of this general problem and awareness of news reports discussing it was enough to remove a service provider from DMCA safe harbor eligibility, the notice and takedown procedures would make little sense and the safe harbors would be effectively nullified.” The court noted that some emails to board members of Veoh came closer to the mark but did not suffice, citing the specific notice requirements and the lack of evidence that Veoh did not act on the information in the emails. The court quoted the Second Circuit’s treatment of the actual and ‘red flag’ knowledge prongs:

“The difference between actual and red flag knowledge is ... between a subjective and an objective standard. In other words, the actual knowledge provision turns on whether the provider actually or “subjectively” knew of specific infringement, while the red flag provision turns on whether the provider was subjectively aware of facts that would have made the specific infringement “objectively” obvious to a reasonable person. The red flag provision, because it incorporates an objective standard, is not swallowed up by the actual knowledge provision under our construction of the § 512(c) safe harbor. Both provisions do independent work, and both apply only to specific instances of infringement.” Citing Viacom, 676 F.3d at 31.

Regarding subpart B of the statute, the court rejected UMG’s interpretation of the “ability to control” test, stating it meant more than the standard for vicarious liability and that the statute presumes some control by the service providers (e.g., the ability to remove infringing material and terminate users’ access). The court agreed with the trial judge that:

“Congress could not have intended for courts to hold that a service provider loses immunity under the safe harbor provision of the DMCA because it engages in acts that are specifically required by the DMCA to obtain safe harbor protection.”

The court relied in part on Section 512(m), which provides that § 512(c)’s safe harbor protection may not be conditioned on “a service provider monitoring its service or affirmatively seeking facts indicating infringing activity,” and cited the Second Circuit’s analysis of what else is required to establish liability:

“We agree with the Second Circuit and hold that, in order to have the ‘right and ability to control,’ the service provider must ‘exert[] substantial influence on the activities of users.’

‘Substantial influence’ may include, as the Second Circuit suggested, high levels of control over activities of users …. Or it may include purposeful conduct …. In this case, Veoh’s interactions with and conduct toward its users did not rise to such a level.” (Citations omitted.)

Ultimately, the Ninth Circuit held that Veoh was still protected by the safe harbor for hosting copyrighted music videos posted by its users: “The evidence demonstrates that Veoh promptly removed infringing material when it became aware of specific instances of infringement.” “The DMCA recognizes that service providers who do not locate and remove infringing materials they do not specifically know of should not suffer the loss of safe harbor protection.”

In two collateral issues, the court affirmed the dismissal of UMG’s claims against three significant investors in Veoh for vicarious, contributory and inducement of infringement. While basing its decision on other grounds, the court noted it would be unusual to provide a safe harbor for the service provider but hold the provider’s investors or board members liable. Second the court affirmed the trial court’s decision not to award attorneys’ fees to Veoh under the ‘offer of judgment’ rule, FRCP 68. The court agreed with the trial court that fees could not be awarded under Rule 68 when they had been denied under 17 U.S.C. §505.