A recent federal appeals court decision provides important lessons for web site and online service operators hoping to be insulated from liability for copyright infringement by users interacting with the site or service. The Ninth Circuit Court of Appeals affirmed a lower court’s decision in Columbia Pictures Industries, Inc. v. Fung, 447 F.Supp.2d 306 (S.D.N.Y., 2006) (transferred to California), finding defendants Gary Fung and isoHunt Web Technologies, Inc. (“Defendants”) liable for contributory copyright infringement on an inducement theory for the operation of torrent sites featuring infringing materials. The Court of Appeals also held that Defendants were not entitled to protection from liability under any safe harbor provisions of the Digital Millennium Copyright Act (“DMCA”), but did reverse and modify in part the district court’s permanent injunction order on the basis that certain provisions of the injunction were too vague or unduly burdensome. In so finding, the Ninth Circuit followed the United States Supreme Court’s reasoning in Metro-Goldwyn-Mayer Studios, Inc., v. Grokster Ltd., 545 U.S. 913 (2005). The decision confirms that secondary liability will apply to websites that cater to users looking for unauthorized access to copyrighted materials and further provides clarification regarding what constitutes a “financial benefit directly attributable to” infringing activity under the DMCA.

The Defendants offer and maintain various websites, known as torrent sites, which find and share torrent files. Torrent files use a peer-to-peer file sharing protocol known as BitTorrent that permits users to download different pieces of a file from various peers and automatically assemble them into a complete file when all the pieces are collected. Such files are popular for uploading pirated movies, television shows and music. Defendants own several torrent sites, included isoHunt.com, torrenbox.com and podtropolis.com.

While the Grokster decision applied the inducement liability standard to one who distributes a “device,” the Court found that such standard also applies to one providing a service, such as the one provided by Defendants. Applying this standard, and affirming the lower court’s decision, the Court found: (i) the services Defendants offered induced infringement; (ii) the predominant use of the services was for infringing purposes (according to the record over 90% of the content on the websites was third-party copyrighted material); and (iii) Defendants promoted and marketed infringement through the websites. The Court concluded that there was “more than enough unrebutted evidence in the summary judgment record to prove that [Defendants] offered . . . services with the object of promoting their use to infringe copyrighted material.”

Defendants argued that the safe harbor provisions for service providers under the DMCA protected them from liability. The Court rejected this defense and held that Defendants failed to meet the definition of a service provider under the DMCA. Most importantly, in rejecting Defendants safe harbor claims, the Court expressly recognized that it had never specified what constitutes a “financial benefit directly attributable to the infringing activity” under Section 512(c)(1)(B) of the DMCA, but stated, “We do so now.” The Court found that Defendant’s revenue stream came from advertisers that were attracted by the “broad availability of infringing materials” on the torrent sites and such revenue depended on the number of users who viewed and then clicked on advertisements. The Defendants pitched advertisers by pointing to the high number of TV shows and movies that were searched by users. Finding that Defendants revenue stream was predicated on the broad availability of infringing materials, the Court held that Defendants induced infringing activity on the site and, as a result, the connection between the infringing activity and Defendant’s income stream met the direct financial benefit prong of Section 512(c)(1)(B).

Furthermore, the Court held that the Defendants had the “right and ability to control” infringing activity since Defendants actively assisted users in locating specific files containing copyrighted content and actively promoted and advertised the ability to do so. Acknowledging that the right and ability to control infringing activity requires “something more” than “merely having the general ability to locate infringing material and terminate users’ access,” the Court found that Defendants sites were organized specifically to help users locate infringing content and Defendant Fung would personally assist users in locating infringing files. While the Court held that Defendants’ inducement actions do not “categorically” remove them from Section 512(c) safe harbor protection, the facts indicate that the direct financial benefit derived from the infringing activity of users and the right and ability to control the activity made them ineligible as a service provider under the DMCA.

The Court’s decision is a victory for content owners against websites that don’t directly infringe their works, but induce end users to do so. In addition, while refusing to make a blanket statement regarding the inapplicability of the DMCA safe harbor in contributory infringement matters, the Court also affirmed that the so-called torrent sites are liable for the actions of their users and provides further clarification on what constitutes a financial benefit attributable to infringing activity.