On May 16, 2007, the U.S. Court of Appeals for the Ninth Circuit (“Ninth Circuit”) vacated a preliminary injunction that barred Google Inc. from displaying thumbnail versions of the plaintiff’s copyrighted photographs.1

The plaintiff, Perfect 10, Inc., generates revenue from the sale of an adult-oriented magazine, subscriptions to its website, and the licensing of reduced-sized images for use on mobile phones. Google operates search engines, including “Google Image Search,” which receives text search strings and returns reduced-sized or “thumbnail”2 images organized in a grid. Search engine users may scan the grid and select an image, which will then launch a browser window displaying the underlying third-party webpage together with a frame at the top of the page showing Google’s webpage with its thumbnail version of the image. Perfect 10 filed an action against Google for direct and secondary copyright infringement based upon Google’s use of Perfect 10’s images as thumbnails in its search results and Google’s linking to third-party websites that display unauthorized copies of Perfect 10’s photographs. Perfect 10 argued that Google was profiting from the alleged direct infringement and third-party infringement because Google was compensated by advertisers when customers conducted Google searches for Perfect 10’s photographs and pay-site passwords. Google asserted the affirmative defense of fair use3 and also asserted that it was entitled to certain liability safe harbors under the Digital Millennium Copyright Act (“DMCA”).4

In February 2006, the district court entered a preliminary injunction prohibiting Google from publicly displaying thumbnail versions of Perfect 10’s photographs. The court declined to preliminarily enjoin Google from linking to third-party websites that display full-size versions of Perfect 10’s photos. The district court’s decision to enjoin display of thumbnail images hinged on the first and fourth copyright fair use factors: the purpose and character of Google’s use of the photographs and its effect upon Perfect 10’s market for thumbnail images. The district court placed particular emphasis on Perfect 10’s licensing of thumbnail images for use on mobile phones and Perfect 10’s argument that Google’s use of the thumbnails would substantially impact its licensing efforts. Perfect 10 and Google both appealed the district court’s order to the Ninth Circuit.

The Ninth Circuit agreed with Perfect 10 that Google’s use of the thumbnail images constituted direct copyright infringement. However, the court reversed the district court’s entry of a preliminary injunction because it found that Perfect 10 is unlikely to overcome Google’s fair use defense based upon its analysis of the four fair use factors: (1) the purpose and character of the use; (2) the nature of the copyrighted work; (3) the amount of work that was used; and (4) the market effect of the new use. When analyzing the purpose and character of Google’s use of Perfect 10’s photographs, the court found that Google is creating an entirely new and constructive use of the original works, i.e., an electronic pointer directing a user to a source of information. Thus, the “transformative” nature of Google’s use of the original copyrighted photographs weighed heavily in favor of a finding of fair use. The nature of the copyrighted work focuses on when the copyrighted work is most valuable, and original publication rights are protected most heavily. Because Google’s thumbnail images were previously published by Perfect 10, this factor only slightly favored Perfect 10. The third factor, the substantiality of the portion used in relation to the copyrighted work as a whole, was found to favor neither party because it was necessary for Google to copy Perfect 10’s entire photographs to allow users to recognize the thumbnail images. Finally, the last factor is the analysis of the market effect of the new use of the work(s). In contrast to the district court, the Ninth Circuit found that this factor also favored neither party because Perfect 10 did not introduce any evidence of actual harm. The court noted that any harm to Perfect 10’s licensing market for thumbnail images on mobile phones was entirely speculative and hypothetical.

In reaching its decision that Google’s use of the thumbnails is a fair use, the Ninth Circuit placed particular emphasis on the transformative nature of Google’s use of the thumbnails and the significant public benefit conferred by Google’s practice. Although Perfect 10 lost its direct infringement claim, the appellate court found that Google could be held contributorily liable if Google: (1) had knowledge that infringing images were available using its search engine, (2) could take simple measures to prevent further damage to Perfect 10’s copyrighted works, and (3) failed to take such steps. The Ninth Circuit remanded the contributory liability claim to the district court for further proceedings, including analysis of whether Google is entitled to certain liability “safe harbors” provided by the DMCA.