First Looks at Copyright and the Cloud --- Recent "Locker" Decisions Probe Infringement Liability and Safe Harbor Issues

By Jon Baumgarten and Noah Gitterman, Proskauer Rose LLP

The emergence of "cloud computing" products and services is drawing considerable attention in legal circles. In the copyright arena, it is taking the form of infringement issues pertaining to purported online "storage lockers" for content uploaded by users. Three recent decisions are of note.

In Disney Enterprises, Inc. et al., v. Hotfile Corp., et al., 2011 U.S. Dist. LEXIS 78387 (July 8, 2011) [enhanced version available to lexis.com subscribers] the Southern District of Florida dismissed direct infringement claims brought by a group of movie studios against Hotfile, an internet storage service, but refused to dismiss claims for inducement, contributory and vicarious liability. In contrast, the Southern District of California recently upheld direct infringement claims against a file storage service but denied claims for vicarious liability in Perfect 10, Inc. v. Megaupload Ltd., et al., 2011 U.S. Dist. LEXIS 81931 (July 27, 2011) [enhanced version]. Even more recently, the Southern District of New York held in Capitol Records Inc. et al. v. MP3tunes LLC et al., Case No. 1:07-cv-09931 (August 22, 2011) [enhanced version] that even if liability attaches, "storage locker" services may be eligible for the safe harbor protections in s. 512(c) of the DMCA. This trio of cases demonstrates the highly dynamic legal landscape that currently exists with respect to internet storage services that are alleged to facilitate infringement by their users.

The Hotfile website allows any user to upload content, including video files, to its servers. The user is then provided with a unique URL that can be used by anyone to download the content. The URL can be disseminated as widely as the user wishes. As alleged in the complaint, Hotfile generates revenue by charging members for a premium service that provides faster downloads, and by charging for "hotlinks" that allow users to download content directly from a URL without first navigating to the Hotfile website. To increase its paying members, Hotfile encourages users to upload popular content by paying them when a file they upload is downloaded 1000 times, and Hotfile also rewards third party websites for directing users to its site through download links. The movie studios alleged that Hotfile knows that the most popular files it hosts are copyright-infringing, and that by encouraging users to upload and link to popular content Hotfile is encouraging them to infringe.

Reaching back to Religious Technology Center v. Netcom On-Line Communications Services, 907 F. Supp. 1361, 1370 (N.D. Cal. 1995) [enhanced version], the Hotfile court found that "there should still be some element of volition" for direct liability to attach, and that Hotfile cannot be directly liable merely because it owns and manages an internet service that allows users to store and access copyrighted content. Relying in part on the Second Circuit's decision in Cartoon Network LP, LLLP v. CSC Holdings, Inc., 536 F. 3d 121 (2d Cir. 2008) [enhanced version / unenhanced version available from lexisONE Free Case Law] the court held that the fact that Hotfile makes multiple copies of each uploaded work does not make its conduct volitional, because those copies are automatically made at the user's instigation. But the court may have gone further in also concluding that because there were no allegations that Hotfile "upload[ed] the copyrighted work itself or us[ed] software to search for material to upload" (2011 U.S. Dist. LEXIS 78387 at *9), it could not be directly liable. The Hotfile court expressly rejected two decisions from the Southern District of New York that suggested that knowledge of massive infringement coupled with an ability to stop the infringement gave rise to a volitional act (id. at *11). See Arista Records LLC v. Usenet.com, Inc., 633 F. Supp. 2d 124, 148 (S.D.N.Y. 2009) [enhanced version] and Capitol Records, Inc, v. MP3tunes, 2009 U.S. Dist. LEXIS 96521 (S.D.N.Y. Oct. 16, 2009) [enhanced version] (prior holding to that discussed below.). The Hotfile court may have stretched the volitional conduct requirement into a high bar for content owners, at least in the context of file storage services.

In contrast, the Southern District of California refused to dismiss a direct infringement claim against Megaupload, a very similar storage service, that was brought by Perfect 10, a creator of adult content (2011 U.S. Dist. LEXIS 81931 at *11-12) [enhanced version]. In that case (and in contrast to the Hotfile court), the court held that allegations that Megaupload rewarded users who uploaded popular content, which Megaupload knew would likely be infringing, sufficiently alleged volitional conduct, and if true showed that Megaupload was more than a mere "passive conduit" for file storage (id. at *11). Interestingly, the Megaupload court dismissed Perfect 10's vicarious liability claim because Perfect 10 failed to allege that Megaupload operated a "closed" system that allowed it to terminate registered users for infringing conduct. Because Perfect 10 alleged that anyone could download files on the service without registration, the court found that the requisite control and supervision for a vicarious liability claim was not present. In Hotfile, although the court took a strict view of direct liability, the court with very little discussion declined to dismiss inducement, contributory and vicarious liability claims.

MP3Tunes dealt with a storage service directed specifically at music recordings. The service at issue allows users (among other things) to upload ("sideload") music tracks that are being made available on third party websites for free - whether those tracks were infringing or not - to the user's personal storage locker. The recordings can then be played by the user on any internet-enabled device. The record-company plaintiffs argued (among other things) that MP3Tunes knew that most of the songs being uploaded by users were obviously infringing. In a summary judgment ruling, the court followed the June 2010 ruling by the S.D.N.Y. in Viacom Int'l, Inc. et al. v. YouTube, Inc. et al., 718 F.Supp.2d 514 (2010) [enhanced version] (now on appeal to the Second Circuit), holding that absent specific knowledge of particular infringements, the service had no obligation to investigate possible infringing activity and would be eligible for protection from liability under the s. 512(c) safe harbor. In MP3Tunes, even if many of the tracks that were uploaded from third party websites were infringing, some were not. Under the court's view of the statute, there were insufficient red flags that could differentiate to the MP3Tunes service those uploads that were infringing from those that weren't. The service therefore could not know about, and could not directly benefit from or control, the infringements, and was eligible for safe harbor protection. (However, the service was subject to contributory liability for failure to remove from users' lockers copies of particular recordings that were particularly identified in the record companies' takedown notices; the service's mere removal of links and the copyright owners' use of broad generalized descriptions of some works were both held insufficient). It remains to be seen whether this expansive view of the s. 512(c) safe harbor will be applied by the district courts to services like Hotfile and Megaupload, which are alleged to encourage or unduly facilitate users' sharing of uploaded works as widely as possible, rather than to keep them stored for personal use (or alleged, in other terms, to be porous or "lockerless" storage lockers.).

These three cases demonstrate the shifting perspectives that courts are bringing to infringement actions against storage providers, and will doubtless be watched and examined for guidance as additional and broader cloud services related to copyright content are developed.

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