Internet service providers faced with possible copyright infringement lawsuits are cheering a ruling by the U.S. Court of Appeals for the Ninth Circuit last month that seems to create more uniform principles and lend greater clarity to the protections granted to video and other content providers under the “safe harbor” provisions of the Digital Millennium Copyright Act.

The primary test spelled out by the ruling appears to be that service providers must make a good faith effort to prevent protected content from being posted on their site in the first place and then take down copyrighted content when notified by owners of an infringement.

On March 14, the Ninth Circuit ruled in UMG Recordings Inc. et al. v. Veoh Networks Inc. et al., case No. 09-56777 that the video-sharing site run by Veoh Networks Inc. was not liable for the copyright claims by Universal Music Group Inc. since Veoh was unaware of the actual infringements alleged and could not have been reasonably expected to take steps to prevent them.

“The evidence demonstrates that Veoh promptly removed infringing material when it became aware of specific instances of infringement,” the Ninth Circuit concluded. “[T]he 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.”

The ruling superseded the Ninth Circuit’s 2011 opinion in UMG Recordings, Inc v. Veoh Networks, Inc. et al [667 F.3d 1022] in which the Court also ruled in Veoh’s favor, agreeing with the district court’s grant of summary judgment to Veoh affirming the company was protected by the DMCA's safe harbor in 17 U.S.C. § 512(c). That provision limits a service provider's 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.”

The Ninth Circuit agreed to revisit the case after the Second Circuit applied a different interpretation of the DMCA's safe harbor provision in a case involving a challenge by Viacom against Google Inc.'s YouTube. When the Ninth Circuit reassessed its 2011 ruling, applying the Second Circuit’s more rigorous analysis of the DMCA, content providers were especially encouraged that the Court once again ruled Veoh was safe from liability for unknowingly hosting copyrighted music videos posted by third party users.

Like other service providers, Veoh allows users to share video content over the Internet. According to the Court’s summary of the case, users can view content uploaded either by other users or by copyright holders such as Sony Music, ABC and ESPN. Until it went out of business three years ago, Veoh provided its services to users free of charge and generated revenue through advertising.

Veoh employees did not review user-submitted videos, titles or tags before the videos were made available to other users. According to the Court, Veoh also employed various technologies to prevent copyright infringement on its system such as “hash filtering” software that disables access to protected materials.

Another filtering software developed by Veoh in-house was used to disable some 60,000 of the more than one million videos the company hosted. Further, users who repeatedly upload protected materials were barred from using the site.

Despite these precautions, Veoh and UMG both agreed some users were able to download videos containing songs UMG owned the copyright on. And so, in September 2007 UMG filed suit against Veoh alleging copyright infringements and contending that Veoh’s efforts to prevent them were “too little too late.”

Throughout the case, UMG argued that Veoh did not qualify for the safe harbor protections of the DMCA because Veoh was tardy in removing copyrighted material and only did so “if identified specifically in a notice of infringement.” UMG also argued that Veoh was not eligible for safe harbor protections because the firm did not just “store” the content but also processed it for display.

Making information on the Internet as open and accessible as possible seemed to be the overriding priority when Congress first passed the DMCA and recognized that “in the ordinary course of their operations service providers must engage in all kinds of acts that expose them to potential copyright infringement liability.”

While Congress acknowledged the potential for abuse, it was also “loath to permit the specter of liability to chill innovation that could also serve substantial socially beneficial functions,” the Court remarked. By limiting liability, the DMCA was designed to “ensure that the efficiency of the Internet will continue to improve and that the {variety and} quality of services on the Internet will continue to expand.”

In general, a service provider under the DMCA is not liable for monetary relief if it “does not have actual knowledge that the {material . . . is infringing},” does not receive a direct financial benefit from the infringement and, when notified of the infringement, it acts expeditiously to remove the protected material.

UMG argued that genuine issues of fact remained as to whether Veoh was aware it was hosting copyrighted materials and that Veoh received a financial benefit from material under its control. The Court disagreed.

“Merely hosting a category of copyrightable content, such as music videos, with the general knowledge that one’s services could be used to share infringing material, is insufficient to meet the actual knowledge requirement,” the Court ruled.

The court rejected UMG's arguments that Section 512(c) of the DMCA applied only to web hosting services as opposed to a much broader class of “service providers,” such as Veoh, and that the statute limited the safe harbor to only "storage" but not "facilitation of access."

Finally, the Ninth Circuit rejected UMG’s contention that the district court applied a too stringent standard for what the courts have termed a “red flag awareness” of copyright violations “based on facts or circumstances from which infringing activity is apparent” under the definitions provided in the law for protected material.

With respect to UMG’s contention that Veoh possessed “actual knowledge” based on red flag awareness, the Court found that UMG had “failed to rebut Veoh's showing 'that when it did acquire knowledge of allegedly infringing material - whether from DMCA notices, informal notices, or other means - it expeditiously removed such material.'”

Instead, the Court held that “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.”

Even after viewing the evidence in a way most favorable to UMG and observing it was possible for a service provider to “bury its head in the sand to avoid obtaining such specific knowledge,” the Court did not find evidence that Veoh had acted wrongly. “Rather, the evidence demonstrates that Veoh promptly removed infringing material when it became aware of specific instances of infringement,” the Court concluded.

The Court affirmed the district court's finding that “Veoh did not have the necessary right and ability to control infringing activity and thus remained eligible for safe harbor protection.” It also agreed with the Second Circuit in the Viacom/YouTube case “that, in order to have the 'right and ability to control,' the service provider must 'exert substantial influence on the activities of users.’"

Veoh Networks was a video internet company based in San Diego, California that allowed users to watch major studio content, independent productions and other user-generated material. The company was about to enter Chapter 7 in February 2010 when its assets were purchased by Qlipso, a social content sharing company. Dmitry Shapiro, Veoh’s founder and CEO, blamed Veoh’s collapse on the costly legal battle with UMG.

“Unfortunately, great vision, a passionate team, tens of millions of users, millions in revenues and victory in court were not enough. The distraction of the legal battles, and the challenges of the broader macro-economic climate have led to our Chapter 7 bankruptcy,” Shapiro wrote in a blog post.

Former Disney chairman Michael Eisner was an early investor along with Time Warner and joined the company’s board in 2006. Part of UMG’s case against Veoh involved emails sent by Disney’s CEO to Eisner complaining about Veoh’s alleged copyright infringement. The Court, however, viewed this as a "deficient" notice for purposes of establishing “red flag awareness” under the safe harbor provisions of the DMCA.