In March, Viacom sued YouTube and its owner, Google, for damages in excess of $1 billion for alleged infringement of Viacom’s copyrights.  Viacom is the media giant which owns television programming networks and shows, including MTV, Nickelodeon, Comedy Central and our children’s favorite, “Sponge Bob,” and movie studios including Dreamworks and Paramount.  Viacom claims that YouTube has actively infringed Viacom’s copyrighted works by publicly performing more than 150,000 unauthorized clips of copyrighted programming owned by Viacom, which have been viewed 1.5 billion times.  Viacom claims that in fact this is only a small percentage of the infringing material on YouTube’s site because YouTube’s tagging system does not permit an easy search for copyrighted material. In addition, Viacom claims that YouTube directly infringes copyright by facilitating copies of copyrighted material to be embedded in websites across the Net. Although YouTube has stated that it has technology to filter copyright infringing material, Viacom claims that it has done nothing to prevent or curtail this massive infringement.

Content providers had previously wondered whether it was worth suing a startup like YouTube. With Google’s $1.65 billion acquisition of YouTube in October, 2006, the answer to that question is now easy: It would be difficult to imagine a defendant with a deeper pocket!

The case is currently in the discovery stage. This article will assess the strength of each side’s arguments.

Legislative Background: Digital Millennium Copyright Act

Central to Viacom’s claim is how the court will interpret provisions of the Digital Millennium Copyright Act.  The DMCA is a 1998 statute that balances the needs of content owners, such as Viacom, with those of internet service providers, including sites such as YouTube, which host content uploaded by users.  The DMCA is supposed to provide immunity from claims of monetary damages to service providers who engage in “passive”, “automatic” actions initiated by users. The DMCA provides that internet service providers do not need to monitor their sites for infringing material. Rather, it established a notice-and-takedown procedure:  in the event a copyright owner complains about an alleged infringement, the site enjoys a “safe harbor” from monetary damages if it takes down the infringing material and complies with the other requirements of the statute, as described below. 

Prerequisites for Sailing into the Safe Harbor

In order to benefit from the safe harbor, a site must:

(a)     adopt a copyright policy requiring termination of repeat copyright infringers in appropriate circumstances,

(b)     implement that policy in a reasonable manner, and

(c)     inform its subscribers of that policy.

These are matters on which our firm regularly advises clients, particularly the thorny questions as to how to legally implement such a policy.  From YouTube’s Website Terms of Use, its filing with the US Copyright Office, and its stated implementation, it appears that YouTube would meet the necessary preconditions to be eligible for the safe harbor.

Sites such as YouTube are not entitled to the safe harbor, however, if they are “aware of facts or circumstances from which infringing activity is apparent” or if they “receive a financial benefit directly attributable to the infringing activity”.

Under What Circumstances Does a Website Lose its DMCA Safe Harbor Protection?

Awareness of Infringing Activity. The question which Viacom raises is whether YouTube was aware of such widespread infringement that it is no longer able to benefit from the safe harbor.

Actual Knowledge. The threshold question is whether YouTube had “actual knowledge” of infringements. Since sites are not required to monitor their sites for infringements, and simple “general awareness” that there is infringing material on a site is not sufficient to constitute “actual knowledge,” it appears that YouTube would not be deemed to have “actual knowledge” of infringements.

Apparent Knowledge. Cases interpreting the DMCA have been very protective of websites. For example, in the case of Hendrickson v. eBay, Inc., 165 F. Supp. 2d 1082 (C.D. Cal. 2001), the owner of the film documentary “Manson” sued eBay for offering for sale copies of his movie.  The court held that eBay was entitled to the safe harbor protection. Similarly, in CoStar Group v. LoopNet, a Fourth Circuit case from 2004, the court held that a website was not liable for infringing photos of real estate posted to its site from users. In Corbis v. Amazon, where a zShop had posted infringing photographs, the court said that to demonstrate “apparent knowledge”, the copyright holder had to show that the website was “clearly a pirate site.” A site would meet this definition if the URL and header information uses terms that show that the purpose is clearly illegal.  In YouTube’s case, it has entered into licensing agreements with many significant owners of content, such as CBS, NBC, the BBC and Universal Music.  Accordingly, as the percent of its infringing content goes down, its argument gets better that it is not “clearly a pirate site.”

The DMCA’s legislative history says that a site will not be able to benefit from the safe harbor if it turns a “blind eye to red flags” that infringing activity is taking place. Because of the mass of infringing videos on YouTube’s site, the question will be: Should YouTube have seen the red flag?  The legislative history does not give an indication of how big or red that flag must be, and no case has addressed this issue. This may be the first to do so.

Financial Benefit. The DMCA also provides that YouTube will not benefit from the safe harbor if it “receives a financial benefit directly attributable to the infringing activity.” The legislative history would seem to provide arguments for both sides. YouTube’s position is strengthened since the Senate Report on the DMCA states that there would be no direct financial benefit in the case where “the infringer makes the same kind of payment as non-infringing users of the provider’s service.” Nevertheless, Viacom could argue, from the Legislative history, that courts are supposed to apply a “common-sense, fact-based approach and not a formalistic one.”  In that case, Viacom could argue that the value of the YouTube service lies in providing access to infringing material, and therefore, it does receive a direct financial benefit from the infringement.

In practice, some courts seem to be influenced by the amount of infringing activity on a site. In the 2001 case of Adobe Ssytems v. Canus Productions, for example, the court held that the operator of a computer fair was not liable to Adobe because only about 100 copies of the infringing software were being sold, and that this was not a major attraction for the 15,000 people who attended. Similarly, in the CoStar v. LoopNet case, the court held that the direct financial benefit test was not met. In that case, plaintiff claimed that 300 of the 33,000 photographs of commercial real estate infringed its copyrights. In addition, that case said importantly that there was no direct financial benefit because the site did not charge for the upload of infringing material. However, in the 2001 Circuit Court decision in A&M Records v. Napster, the amount of infringing music on the site was a major factor holding the site liable for vicarious copyright infringement.  Accordingly, an important question will be whether the court addresses the relevance of a significant amount of infringing material on the YouTube site.

The recent Ninth Circuit decision of Perfect 10 v. Amazon.com (May 16, 2007) could have addressed this issue of direct financial benefit, but did not. Plaintiff Perfect 10 sued Google due to thumbnail images of its photographs of nude women which were viewable by an image search. There are two prongs to the vicarious liability test: (1) defendant exercises control over the direct infringer; that is, it has the “right and ability to supervise the direct infringer” and (2) defendant “derives a direct financial benefit” from the infringement. Although the District Court held that Google was not vicarioulsy liable for copyright infringement because it did not exercise control over the infringer, it did hold that Google met the second test of directly financially benefited from infringing photographs because Google’s advertising revenue increased the more times the images were viewed. The court did not require that the plaintiff prove that the images were a significant “draw” to attract people to the image search site. This is different from the cases above, such as CoStar v. LoopNet and Adobe v. Canus, where the court made an assessment of the importance and quantity of the infringing material. 

On appeal, however, the Circuit Court agreed that Google did not exercise control over the defendant, so it never arrived at the key question raised by the District Court: whether to import the vicarious infringement test of “direct financial benefit” into the DMCA. This would have been a relatively easy test for Viacom to meet, and would strip away YouTube’s DMCA safe harbor. My own view is that the Perfect 10 v. Google District Court test would have made too many sites liable under the DMCA and is too low a threshold for eliminating the safe harbor. I believe that it is not the correct approach in order to meet the legislative goals of the DMCA, which is to permit sites to host content posted by third parties.

This case may also address two other critical questions under the DMCA:

• Requirement to Monitor? Is YouTube required to monitor its site for copyright infringing material if it has the technology to do so? This would upend the basic assumption of the DMCA—that site owners are not required to censor, filter or preview material. YouTube has been quoted as saying that it would only use copyright protection measures for parties which entered into a licensing arrangement with it. Although courts, such as in Grokster, have been reluctant to require companies to design their products in a way to minimize infringement, the question is whether YouTube, which has this technology, and knows of infringing activity on its site, is required to apply this technology. This could have a big impact for whether sites must actively monitor their activity. While a “requirement to monitor” would be a revolutionary reinterpretation of the DMCA, there are signs that this may be underway.

First, The Perfect 10 v. Amazon.com case analyzed the contributory infringement claim and stated, quite amazingly, that “There is no dispute that Google substantially assists websites to distribute their infringing copies to a worldwide market and assists a worldwide audience of users to access infringing materials. We cannot discount the effect of such a service on copyright owners, even though Google’s assistance is available to all websites, not just infringing ones.”  In other words, the court implied that every search engine could be contributorily liable for copyright infringement! The Ninth Circuit concluded: “Applying our test, Google could be held contributorily liable if it had knowledge that infringing Perfect 10 images were available using its search engine, could take simple measures to prevent further damage to Perfect 10’s copyrighted works, and failed to take such steps.” (my emphasis added.)  This case breaks new ground by stating that proactive measures, if they are simple, must be taken.

Second, there seems to be some movement in the industry that filtering may become the industry-standard method of dealing with posting infringing content. If this is the case, then it may be problematic for sites which do not filter.  Some recent examples are the following:

• On April 17, 2007, Google CEO Eric Schmidt announced that YouTube will soon launch filtering
• On May 14, 2007, MySpace and DailyMotion stated that they will filter content
• On June 13, 2007, at the Digital Hollywood Summit, AT&T announced that it will filter content.
• Other important sites are using Audible Magic music filtering software, including GoFish, Grouper, Break.com, and Eyespot.

Third, there have been several European decisions, often at a preliminary injunction or early stage of litigation, which have held against the user-generated content sites. While European law obviously has no direct impact on the Viacom case under US law, this does seem to indicate that there is a general trend or sense that sites with significant amount of infringing material are in a precarious legal situation.  This is particularly so since the EU Directive on e-Commerce is in many ways more protective of sites hosting third-party content than the DMCA is. Some of these recent cases are:

·         France. June 22, 2007. Holding against MySpace.

·         Belgium. July 3, 2007. Holding ISP Scarlet is required to either block or filter infringing content on P2P networks.

·         France. July 13, 2007. Court holds DailyMotion infringed copyright, even though it was a mere hoster of content. The court condemned DailyMotion for permitting infringing material to be made available, and the court presumed DailyMotion’s knowledge of infringing activity.

·         Germany. Court in Cologne issues injunction against VideoTube after talks broke down with GEMA, the copyright collecting society in Germany (equivalent to ASCAP or BMI in the United States.)

Therefore, while I would previously have been surprised if a court required YouTube to actively monitor its site, there is a certain practical and legal trend where user-generated content sites may no longer be able to rely exclusively on a DMCA-defense and may be required to take at least “simple measures” to prevent infringements.

• Specificity of DMCA Notice. How specific do the notices of infringing material need to be? Can Viacom, for example, just say to YouTube, “All clips from MTV are infringing. You go find and take down those clips!”  Or must Viacom provide the URL to each infringing file? Although this sounds like a very technical question, it has a meaningful practical influence on whether a site must proactively monitor its site for recurring infringements. 

Application of the Grokster “Active Inducement” Theory. Another big issue for YouTube is how the court will apply the new “active inducement for copryight infringement” theory articulated in the 2005 Supreme Court decision of MGM Studios v. Grokster. In that case, the Supreme Court held Grokster liable for distributing peer-to-peer software because its business model was premised on infringement—it benefited from the high-volume use of infringing software. The question is whether the court will similarly say that YouTube is liable for actively inducing infringement because it benefits from advertising revenue which is directly tied to the quantity of infringing material.  The Perfect 10 v. Amazon.com Ninth Circuit decision in May, 2007 did not go so far and did not hold Amazon.com contributorily liable for copyright infringement under the Grokster test. Nevertheless, Viacom’s complaint focused heavily on YouTube’s active strategy of permitting videos to be embedded in sites throughout the net, and not just on www.youtube.com.  In so doing, Viacom claims that YouTube has taken an active part in directly infringing Viacom’s copyright.

Conclusion. Many commentators believe that Viacom sued YouTube to obtain negotiating leverage to obtain a better licensing deal with YouTube. This may indeed be the case. An example of this was that Warner Music sued imeem in May, 2007 on similar grounds as the YouTube case, and the parties settled, and entered into a licensing arrangement just two months later, in July 2007.  Others believe that Viacom is simply trying to gain publicity, and particularly to draw marketing attention to its deal with Joost.com, billed as “a new way of watching TV on the internet”. Because of the powerful arguments which Viacom has, due mainly to the widespread distribution of infringing material on YouTube’s site, and the recent trend to adopt filtering technology, and the strong defenses which YouTube can raise, due mainly to the structural protection of the DMCA, which provides a safe harbor for sites like YouTube, this could lead to an important legal precedent which could influence whether user-posting sites continue to expand rapidly.

If I had to guess, my view is that the case will, like the Warner Music v. imeem litigation, settle rather than go to final judgment.  Both sides have too much to lose with an unfavorable court decision. While the facts are difficult ones for YouTube, the law, particularly the DMCA, is in its favor, making the outcome of this case quite difficult to predict.

Practical Tip: Napster was unable to enjoy DMCA protections because it failed to follow the formalities of establishing and implementing a correct copyright policy and filing with the US Copyright Office. Every site which permits postings by users should be sure to:

(a)     establish a copyright policy which meets the DMCA requirements,

(b)     implement that policy to terminate repeat copyright infringers and meet the other requirements of the DMCA, and

(c)     file a proper notice with the US Copyright Office.