On March 13, 2007, media heavyweight Viacom hit YouTube with a highly publicized lawsuit that tests the bounds of copyright law and threatens to shut down the streaming video Internet giant, much like its musical predecessor, Napster. According to Viacom, YouTube “has harnessed technology to willfully infringe copyrights on a huge scale,” and is thus liable for direct, contributory and vicarious copyright infringement, and for inducement of copyright infringement. Viacom seeks at least a billion dollars in damages and a permanent injunction against YouTube.

For YouTube, the stakes could not be higher. If it loses, YouTube would have to drastically re-tool its business model and technology platform or risk becoming the next Napster—a once white-hot Internet content provider driven out of its original business by copyright lawsuits. Indeed, since Viacom filed its lawsuit, YouTube has been named in proposed class action lawsuits for copyright infringement in New York and Tennessee. YouTube’s continued viability thus turns on the interpretation of the Digital Millennium Copyright Act (“DMCA”) and its application to a new kind of Internet technology.

For the un-initiated, YouTube (www. YouTube.com) is a popular website that allows users to upload, view and share video clips. It was created in 2005 and hosts, among other things, movie and television clips, music videos, and content created by users, including video blogs and short original video. Registered users have the ability to upload an unlimited number of clips to the website.

In October 2006, Google announced that it was acquiring YouTube for $1.65 billion in stock. The deal closed a month later. Meanwhile, YouTube began reaching agreements with content providers such as CBS, Universal Music Group and Sony BMG Music Entertainment to permit the uploading of copyrighted materials to the website. According to Viacom, its own negotiations with YouTube stalled because YouTube was unwilling to reach a fair market agreement for Viacom content. Without a license to such content, Viacom claims, YouTube is committing and contributing to acts of copyright infringement.

YouTube has attempted to take legal sanctuary in the “safe harbor” provisions of the DMCA. Enacted in 1998, the DMCA was designed in part to shift the burden of monitoring copyright infringement from Internet service providers to content providers. Thus, the DMCA limits injunctive relief and bars the recovery of money damages from online service providers engaged in certain conduct. 17 U.S.C. 512.

A threshold issue for YouTube, and indeed, for any defendant seeking protection under the DMCA’s safe harbor, is whether it is a “service provider” under the DMCA. Under the DMCA, the test for a “service provider” depends on whether the conduct at issue is (1) transitory communications, (2) system caching, (3) information storage, or (4) information location tools (e.g., search engines). 17 U.S.C. 512(a)-(d). The DMCA provides a broad definition of “service provider” for the latter three categories, as compared to the first. See id., § 512(k)(1)(A)-(B). In short, and regardless of the conduct at issue, safe harbor under the DMCA requires the defendant to be a passive conduit or a repository for infringing material.

The protections afforded by Section 512(c) of the DMCA also require three additional conditions for any service provider seeking safe harbor. First, the service provider must have no actual knowledge of infringement and no awareness of facts or circumstances from which infringing activity is apparent, or it must act expeditiously to remove or disable access to the material upon obtaining such knowledge or awareness. Second, if the service provider has the right and ability to control the infringing activity, it must not receive a financial benefit directly attributable to the infringing activity. Third, upon receiving proper notification of the claimed infringement, the defendant must expeditiously take the material down or block access to it.

Whether a service provider can satisfy the first condition of the DMCA depends, in part, on the provider’s technological toolbox. For example, a provider’s search engine, if used to identify and isolate copyrighted material, could also be used by the content owner as evidence of knowledge of infringement. On the other hand, if the search engine is fully automated, the provider may not “know” whether copyrighted material is available through it service. Of course, even a service provider’s actual knowledge of infringement is permissible under the DMCA safe harbor if it moves expeditiously to remove the offending material. For this reason, it is critical that service providers protect their flank by swiftly responding to take down notifications from content providers. A rapid response is critical for purposes of the DMCA safe harbor and could avoid a potential lawsuit altogether. Whether a service provider has the “ability to control the infringing issue” required to pierce DMCA immunity depends, in part, on what monitoring the service provider already does. Prior decisions interpreting the DMCA suggest the limited voluntary monitoring of content does not equate to ability to control. For instance, a court rejected the argument that eBay’s voluntary practice of engaging in limited monitoring of its website for “apparent infringements” amounted to the ability to control under the DMCA. See Hendrickson v. eBay, 165 F. Supp. 2d 1082, 1094 (C.D. Cal. 2001). The rationale was that if accepted, the argument would create a perverse incentive for the service provider to bury its head in the sand while its users infringed. Nevertheless, the line separating limited monitoring from the “ability to control” is fuzzy at best, and service providers should be aware that the degree to which they voluntarily monitor content may affect eligibility for the DMCA safe harbor.

If the service provider does have the “ability to control” content, it cannot receive a financial benefit “directly attributable to the infringing activity” and expect safe harbor. The DMCA’s legislative history shows that a service provider would generally be considered to receive a “directly attributable” benefit where the value of the service lies in providing access to infringing material, not where the infringer makes the same kind of payment for services as non-infringing users. H.R Rep. 105-551(II), at 54 (1998).

The YouTube lawsuit is still in its infancy, and it remains to be seen whether YouTube will stake out territory that will insulate it from liability under the DMCA. In the meantime, it serves as a reminder to all service providers that an array of decisions—from technology platform to responding to cease and desist letters—may affect their own eligibility for the DMCA’s safe harbor.