The Ninth Circuit has confirmed the continued viability of an important 2003 fair use precedent in a case critical to the continued evolution of Web. 2.0. Perfect 10 v. Amazon, 2007 U.S. App. LEXIS 11420 (9th Cir. May 16, 2007). Although the Court of Appeals did not completely dispose of the action, it threw out the preliminary injunction against Google, decided most of the issues in Google’s favor, and remanded the case for limited further proceedings.

Perfect 10 distributes photographs via its adult website and magazine. Myriad third-party websites make infringing copies of these images, which are then cataloged by Google’s search engine. Google’s image search function displays an array of thumbnail-sized images, stored on Google’s servers. Clicking on a thumbnail opens a new window with a Google heading at the top, a link to the original site, and a large section of the web page which displays a full-size image of the underlying web page, framed within the Google-generated page. The Ninth Circuit had upheld similar functions as fair use in its 2003 decision in Kelly v. Arriba Soft. But Perfect 10 persuaded the district court that circumstances had overtaken Arriba Soft, and obtained a preliminary injunction against thumbnail copying and display. Perfect 10 entered into a licensing arrangement whereby thumbnails of its pictures could be downloaded to cell phones, and argued that Google’s activities impaired the value of Perfect 10’s copyrights, tilting the fair use determination against Google.

The Ninth Circuit disagreed, focusing on the highly transformative nature of the search engine use and the “great value” the use provides to the public. The Court of Appeals held that even though the defendant had a commercial purpose, market harm cannot be presumed where the use is transformative.

On the framing issue: From the perspective of the end-user, when an image search is performed, it may look as though Google is displaying the web page containing the full-sized infringing photos. But, held the Ninth Circuit, Google is only transmitting a link that allows the end user’s browser to integrate a portion of the original source web page into the Google web page. Since it is the infringing third-party sites and not Google that transmits the infringing images to the end-user, such linking and framing directly infringes neither the display nor the distribution rights.

The Ninth Circuit next considered whether Google may be secondarily liable for framing the third-party images. Contributory copyright infringement requires an underlying direct infringement and that the defendant, with knowledge, materially assists in the infringement. Interpreting the U.S. Supreme Court’s 2005 Grokster decision, the Court of Appeals re-examined the knowledge element, and held that “a computer system operator can be held contributorily liable if it ‘has actual knowledge that specific infringing material is available using its system,’ … and can ‘take simple measures to prevent further damage’ to copyrighted works, … yet continues to provide access to infringing works.” Because the district court had not resolved various factual matters germane to this new test, the Ninth Circuit remanded for further consideration.

As to vicarious infringement, the Ninth Circuit held that mere linking to infringing third-party sites, with neither the legal authority nor the practical power to stop those website operators from their infringing activity, is insufficient to establish liability.