The MGE case

The MGE case involved uninterruptible power supply (“UPS”) machines manufactured by MGE, some of which require the use of MGE’s copyrighted software programs Pacret and Muguet during servicing. The software requires connection of an external hardware security key (a “dongle”) to the laptop serial port. When the software is activated, it searches for a properly programmed dongle before it will fully launch. Once launched, the software will go through a second series of protocol exchanges with the data located on the UPS machine’s microprocessors to confirm that MGE software is communicating with MGE hardware. If the protocol exchange is successful, MGE’s software proceeds to collect system status information for the technician.

MGE’s dongle does not prevent the literal code or text of MGE’s copyrighted computer software from being freely read and copied once access to its programs is obtained. The dongle does not use any encryption or other form of protection to prevent copyright violations.

After MGE introduced its security technology, software hackers published information on the Internet disclosing general instructions on how to defeat the external security features of a hardware key. Once the software is cracked and the security key is defeated, the software can be accessed and used without limitation. MGE did not adduce any evidence that any of the defendant’s employees were responsible for altering (circumventing) the Pacret and Muguet software such that a dongle was not required to use the software.

The Court gave two reasons for finding no DMCA violations. The defendants had only used software that had already been circumvented. There was no evidence that they had circumvented the MGE TPM. The DMCA’s anti-circumvention provision does not apply to the use of copyrighted works after the technological measure has been circumvented, targeting instead the act of circumvention itself. Universal City Studios, Inc. v. Corley, 273 F.3d 429, 443 (2d Cir.2001). The DMCA case, therefore, had to fail.

“Moreover, the DMCA’s anti-circumvention provision does not apply to the use of copyrighted works after the technological measure has been circumvented, targeting instead the circumvention itself. Universal City Studios, Inc. v. Corley, 273 F.3d 429, 443 (2d Cir.2001)… Without proving GE/PMI actually circumvented the technology (as opposed to using technology already circumvented), MGE does not present a valid DMCA claim. See id. (“[T]he DMCA targets the circumvention of digital walls guarding copyrighted material (and trafficking in circumvention tools), but does not concern itself with the use of those materials after circumvention has occurred.)

Because the DMCA does not apply to mere use of a copyrighted work, and because MGE has not shown that GE/PMI circumvented MGE’s software protections in violation of the DMCA, the district court did not err in granting GE/PMI’s Rule 50(a) motion dismissing MGE’s DMCA claim.”

That ground alone should have disposed of the case. However, the Court also stated, in what is arguably obiter dicta, that the DMCA case also failed because MGE had not shown that its dongle protected its software against an infringement of a right under the Copyright Act. Citing a previous decision of the Federal Circuit in Chamberlain Group, Inc. v. Skylink Techs., Inc., 381 F.3d 1178 (Fed.Cir.2004) the Court stated that:

“The DMCA prohibits only forms of access that would violate or impinge on the protections that the Copyright Act otherwise affords copyright owners. See Chamberlain Group, Inc. v. Skylink Techs., Inc., 381 F.3d 1178, 1202 (Fed.Cir.2004). The Federal Circuit, in analyzing the DMCA’s anti-circumvention provision, concluded that it “convey[s] no additional property rights in and of themselves; [it] simply provide[s] property owners with new ways to secure their property.” Id. at 1193-94. Indeed, “virtually every clause of § 1201 that mentions ‘access’ links ‘access’ to ‘protection.’ ” Id. at 1197. Without showing a link between “access” and “protection” of the copyrighted work, the DMCA’s anti-circumvention provision does not apply. The owner’s technological measure must protect the copyrighted material against an infringement of a right that the Copyright Act protects, not from mere use or viewing.”

As can be seen from the above, Prof. Geist’s summary of the case is not accurate. The MGE case did not state that the “DMCA is limited to guarding access controls only to the extent that circumvention would violate the copyright rights of the copyright owner”; in other words it did not hold that circumvention of an access control TPM is illegal only when done for an infringing purpose. Rather it stated that there must merely be a link between “access” which the TPM protects and “protection” of some right of the copyright owner, e.g., the TPM must only protect a work from some unauthorized act covered by copyright.

Accordingly, even under the MGE decision, infringement as a purpose of the circumvention need not be shown. The circumvention of an access control TPM would violate the DMCA as long as the TPM protects a work against some unauthorized act that the copyright holder has the right to control. There would still be liability, for example, if the access control TPM is circumvented for a non-infringing purpose, such a fair use, as long as the TPM also prevents other uses not authorized by the copyright owner.

Prof. Geist’s summary of the case is also incomplete. Readers of his blog would be left with the impression that the MGE case is rightly decided and that it reflects the state of US law. However, both assumptions would be inaccurate.

In suggesting that a technological measure must protect copyrighted material against an infringement of a right that the Copyright Act protects, the Court misinterpreted Section 1201(a) of the DMCA and, as other commentators have pointed out (such as here and here) has created a split in the US courts which have construed the anti-circumvention provisions of the DMCA not to require any proof that an access control TPM must protect a work against some unauthorized act covered by copyright.

The MGE decision is contrary to the legislative history of the DMCA

The relevant provisions of the DMCA are as follows:

Section 1201 of the DMCA

VIOLATIONS REGARDING CIRCUMVENTION OF TECHNOLOGICAL MEASURES-

(1)(a) No person shall circumvent a technological measure that effectively controls access to a work protected under this title …

(2) No person shall manufacture, import, offer to the public, provide, or otherwise traffic in any technology, product, service, device, component, or part thereof, that—

(A) is primarily designed or produced for the purpose of circumventing a technological measure that effectively controls access to a work protected under this title;

(B) has only limited commercially significant purpose or use other than to circumvent a technological measure that effectively controls access to a work protected under this title; or

(C) is marketed by that person or another acting in concert with that person with that person’s knowledge for use in circumventing a technological measure that effectively controls access to a work protected under this title.

(3) As used in this subsection—

(A) to `circumvent a technological measure’ means to descramble a scrambled work, to decrypt an encrypted work, or otherwise to avoid, bypass, remove, deactivate, or impair a technological measure, without the authority of the copyright owner; and

(B) a technological measure `effectively controls access to a work’ if the measure, in the ordinary course of its operation, requires the application of information, or a process or a treatment, with the authority of the copyright owner, to gain access to the work.

(b) ADDITIONAL VIOLATIONS- (1) No person shall manufacture, import, offer to the public, provide, or otherwise traffic in any technology, product, service, device, component, or part thereof, that—

(A) is primarily designed or produced for the purpose of circumventing protection afforded by a technological measure that effectively protects a right of a copyright owner under this title in a work or a portion thereof;

(B) has only limited commercially significant purpose or use other than to circumvent protection afforded by a technological measure that effectively protects a right of a copyright owner under this title in a work or a portion thereof; or

(C) is marketed by that person or another acting in concert with that person with that person’s knowledge for use in circumventing protection afforded by a technological measure that effectively protects a right of a copyright owner under this title in a work or a portion thereof.

Section 1201 of the DMCA divides technological measures into two categories: measures that prevent unauthorized access to a copyrighted work and measures that prevent unauthorized copying of a copyrighted work. Making or selling devices or services that are used to circumvent either category of technological measure is prohibited in certain circumstances. As to the act of circumvention in itself, the provision prohibits circumventing the first category of technological measures, but not the second.

The DMCA “anti-trafficking” provisions are similar, except that section 1201(a)(2) covers those who traffic in technology that can circumvent “a technological measure that effectively controls access to a work;” whereas section 1201(b)(1) covers those who traffic in technology that can circumvent “protection afforded by a technological measure that effectively protects a right of a copyright owner.” In other words, although both sections prohibit trafficking in a circumvention technology, the focus of s. 1201(a)(2) is circumvention of technologies designed to prevent access to a work, and the focus of s. 1201(b)(1) is circumvention of technologies designed to prevent copying of the work or some other act that infringes a copyright.

The legislative history shows that although the prohibitions in ss. 1201(a) and (b) are worded similarly and employ similar tests, they are designed to protect two distinct rights and to target two distinct classes of devices. The legislative history of s. 1201(a) shows that Congress had intended to confer upon copyright owners the ability to preclude unauthorized access to a work using TPMs without the need for any proof that the circumvention of the TPM would result in an infringement or facilitate an infringement. For example, the Senate Report stated the following:

Although sections 1201(a)(2) and 1201(b) of the bill are worded similarly and employ similar tests, they are designed to protect two distinct rights and to target two distinct classes of devices. Sub-section 1201(a)(2) is designed to protect access to a copyrighted work. Section 1201(b) is designed to protect the traditional copyright rights of the copyright owner. As a consequence, subsection 1201(a)(2) prohibits devices primarily designed to circumvent effective technological measures that limit access to a work. Subsection 1201(b), on the other hand, prohibits devices primarily designed to circumvent effective technological protection measures that limit the ability of the copyrighted work to be copied, or otherwise protect the copyright rights of the owner of the copyrighted work. The two sections are not interchangeable, and many devices will be subject to challenge only under one of the subsections. For example, if an effective technological protection measure does nothing to prevent access to the plain text of the work, but is designed to prevent that work from being copied, then a potential cause of action against the manufacturer of a device designed to circumvent the measure lies under subsection 1201(b), but not under subsection 1201(a)(2). Conversely, if an effective technological protection measure limits access to the plain text of a work only to those with authorized access, but provides no additional protection against copying, displaying, performing or distributing the work, then a potential cause of action against the manufacturer of a device designed to circumvent the measure lies under subsection 1201(a)(2), but not under subsection 1201(b).

This, in turn, is the reason there is no prohibition on conduct in 1201(b) akin to the prohibition on circumvention conduct in 1201(a)(1). The prohibition in 1201(a)(1) is necessary because prior to this Act, the conduct of circumvention was never before made unlawful. The device limitation in 1201(a)(2) enforces this new prohibition on conduct. The copyright law has long forbidden copyright infringements, so no new prohibition was necessary. The device limitation in 1201(b) enforces the longstanding prohibitions on infringements.

Professor Jane C. Ginsburg summarized the legislative history on this point as follows:

… there is considerable evidence from the text and from the legislative history that Congress did intend to create an additional copyright regime, based on the control over access to digitally distributed works of authorship. The text indicates that the “access” that section 1201(a) protects goes beyond traditional copyright prerogatives; it distinguishes “access” from a “right of the copyright owner under this title.” Some activities subject to access controls do not implicate traditional copyright owner rights such as reproduction and public performance. For example, an access control may limit the number of viewings of a motion picture distributed on a DVD. But if the viewings occur at home, they likely do not come within the traditional scope of exclusive rights. Thus, suppose I purchase a time-loaded or limited-viewing DVD, for a lower price than an unlimited viewing DVD, and that I circumvent an access protection in order to obtain unlimited number of private viewings of the film for an unlimited time. I have not committed copyright infringement, because the public performance right does not reach the extra viewings. I have, however, defeated the purpose of offering the film on a pay per-view or similar basis. The legislative history indicates that the DMCA was designed in part specifically to foster a variety of business models offering the public a diversity of levels of access, for a diversity of prices. As the House Commerce Committee reported:

[A]n increasing number of intellectual property works are being distributed using a “client-server” model, where the work is effectively “borrowed” by the user (e.g., infrequent users of expensive software purchase a certain number of uses, or viewers watch a movie on a pay-per-view basis). To operate in this new environment, content providers will need both the technology to make new uses possible and the legal framework to ensure they can protect their work from piracy.

Acts prohibited: Section 1201 prohibits the act of circumventing an access control, and the “trafficking” in devices that circumvent either access controls or “rights” controls. It does not prohibit the act of circumventing a rights control, in part because the results of that act will be directly infringing (or will qualify for an exception), and in part because the most economically significant act is the distribution of the device that will allow the end-user to circumvent. By contrast, circumvention of an access control does not directly result in an infringement. If circumvention of an access control is not unlawful, then, arguably, dissemination of a device that enables circumvention of an access control would not be wrongful either. By making the act of access circumvention unlawful, the DMCA lay a stronger foundation for prohibiting the dissemination of enabling devices as well.

In considering the legislative history of Section 1201(a), Columbia Professor June Besek also explained that, “providing copyright owners with the ability to preclude unlimited access was a goal of the DMCA, not just an unforeseen and unfortunate consequence.”

MGE is inconsistent with prior decisions interpreting the DMCA

A number of cases have interpreted the access control and trafficking in access control device prohibitions provisions of the DMCA provisions explicitly rejecting any contention that such claims are tied to any requirement that the access control TPM also prevent unauthorized copying or another act that would be infringing.

For example, an injunction was obtained in Universal City Studios, Inc. v. Reimerdes to restrain the dissemination of the DeCSS program under the anti-trafficking access control prohibition in s. 1201(a)(2). The principal issue was whether that provision of the DMCA applied to conduct that was non-infringing such as fair use. The Court held that Congress had explicitly considered the issue and had made a clear policy choice to make the anti-trafficking access control provision apply even where the uses of the circumvention device would be for non-infringing purposes. Congress specifically decided not to permit statutory defenses to infringement such as fair use to be grounds for not violating the anti-trafficking access control provision or the anti-circumvention prohibition in s. 1201(a)(1)(A). Instead it crafted a series of exemptions to those provisions, exemptions which would have been redundant if the statutory exemptions to infringement also applied as defenses to the anti-trafficking access control provision and the anti-circumvention provision.

The Second Circuit in Corley affirmed the decision in Reimerdes. In doing so it confirmed that fair use is not a defense to unauthorized circumvention of TPMs.

[The Appellants] … contend that subsection 1201(c)(1), which provides that “[n]othing in this section shall affect rights, remedies, limitations or defenses to copyright infringement, including fair use, under this title,” can be read to allow the circumvention of encryption technology protecting copyrighted material when the material will be put to “fair uses” exempt from copyright liability. We disagree that subsection 1201(c)(1) permits such a reading. Instead, it clearly and simply clarifies that the DMCA targets the circumvention of digital walls guarding copyrighted material (and trafficking in circumvention tools), but does not concern itself with the use of those materials after circumvention has occurred. Subsection 1201(c)(1) ensures that the DMCA is not read to prohibit the “fair use” of information just because that information was obtained in a manner made illegal by the DMCA. The Appellants’ much more expansive interpretation of subsection 1201(c)(1) is not only outside the range of plausible readings of the provision, but is also clearly refuted by the statute’s legislative history.

Another case which reached a similar conclusion is Real Networks Inc. v. Streambox, Inc. The case involved an interpretation of the anti-trafficking access control prohibition in s. 1201(a)(2) and the anti-trafficking rights control prohibition in s. 1201(b)(2). Streambox’s primary defense was that its anti-circumvention tools allowed “consumers to make `fair use’ copies of RealMedia files, notwithstanding the access control and copy protection measures that a copyright owner may have placed on that file.” The Court rejected the contention that the anti-trafficking provisions had a linkage to a showing that the potential uses had to be infringing or to facilitate infringement. The Court held that the fair use defense to copyright infringement did not apply to the anti-trafficking provisions in the DMCA. The DMCA was interpreted in this way in Sony Computer Entertainment America Inc. v. GameMasters as well. There a California court enjoined the sale of a device that circumvented technological measures used by Sony to prevent access to software embedded in Sony’s PlayStation console.

The holding in the MGE case clearly conflicts with the above authorities. So how did the MGE case reach the conclusion it did? Besides (apparently) failing to consider the legislative history, the Court also inaptly relied on dicta from the Chamberlain and Lexmark cases without appreciating what was in issue or what was decided in those cases.

The Chamberlain case involved an attempt by Chamberlain to prevent a competitor, Skylink, from bypassing a security system in order to make its universal transmitters interoperable with Chamberlain’s Security+ line of garage door openers. Chamberlain contended that this violated s1201(a)(2) of the anti-trafficking clause of the DMCA. Chamberlain’s allegation was simply that the only way for the transmitter to interoperate with a Security+ GDO was by “accessing” copyrighted software, something which the court held the copyright holder had consented to. This meant that it was impossible for Chamberlain to prove that any circumvention was carried out “without the authority of the copyright owner,” a statutory prerequisite for all section 1201 violations. That was the ratio of the case. However, even the Chamberlain dicta cited in the MGE opinion are inapposite. There was no conceivable way that unauthorized access to the GDO protected by the TPM could have led to infringement of a right protected by copyright: it simply allowed the user to open a garage door. The TPM was designed to be used to bar the interoperability of an independent product, not to protect any copyright related interest that Chamberlain had in its software.

The Lexmark case involved an attempt by Lexmark to prevent third parties from using unauthorized printer cartridges with its printers. Lexmark claimed infringement of a program that controlled the printer’s operation. Lexmark sought to control access to the program and to printer operation, through use of an “authentication sequence,” which was satisfied only when Lexmark-approved toner cartridges were used. The defendant sold a microchip that performed the authentication sequence, thereby allowing customers to use Lexmark printers without using Lexmark-approved toner. Lexmark sued, claiming that the defendant had circumvented the authentication sequence in violation of the DMCA. The Sixth Circuit ruled against Lexmark. The chief ground for doing so was that all three of the anti-circumvention liability provisions of the DMCA require the claimant to show that the “technological measure” at issue “controls access to a work protected under this title” which is to say a work protected under the general copyright statute. The Court found that one of Lexmark’s programs protected by the TPM was so trivial that it did not qualify as a “work protected under [the copyright statute],” … so the DMCA necessarily would not protect it. In the case of another program involved in the case, which was subject to copyright protection, the Court also held that the authentication sequence did not effectively control access to the program within the meaning of the DMCA, because alternative means approved by the copyright owner could be used to access the program.

It is also striking that the MGE decision absolved the defendant of liability under the DMCA in a case in which the defendant, assuming it circumvented the dongle at all (rather than simply taking advantage of a program from which dongle protection had previously been removed), used its resulting access to infringe copyright, a conclusion that even the defendant did not dispute. The Chamberlain and Lexmark cases are thus entirely inapposite to the facts in the MGE case.

The Fifth Circuit’s apparent conclusion that the circumvention of a dongle that controls access to a computer program does not amount to a violation of section 1201(a)(1) also flies in the face of a full decade of administrative precedent in U.S. law. Under section 1201(a)(1)(C), the U.S. Copyright Office holds a proceeding every three years to consider whether the prohibition on circumvention of access controls is unduly impeding non-infringing uses of copyright works, and is authorized to adopt limited exceptions to the prohibition in order to remedy these problems. In all four such proceedings that have been held since the first one in 2000, an exception has been recognized to permit the circumvention of dongles under specific circumstances (generally, when the dongle is obsolete and no longer supported by the software publisher). In the most recent proceeding, earlier this week, an exception to section 1201(a)(1) to allow by-passing of dongles was once again recognized. Since, under the statute, the Copyright Office is allowed to adopt an exception only as to conduct that would otherwise be a violation of section 1201(a)(1); AND since the basis for adopting an exception is to foster non-infringing conduct that would otherwise be unduly burdened by the DMCA prohibition; it seems incontrovertible that a dongle controlling access to a computer program is an access control technology whose circumvention (absent any exception) is a violation of section 1201(a)(1); and that this is so even when the use of the software program that the dongle prevents is not itself an infringement of copyright. The MGE decision does not even refer to this unbroken series of decisions, by the expert agency in U.S. copyright matters, that are entirely inconsistent with the Court’s conclusions.

The above analysis shows that the MGE case is in conflict with prior decisions and does not reflect the state of US law on this issue, except perhaps in the three states comprising the 5^th Circuit.

Conclusion

Prof. Geist’s assertions about the MGE case cannot be supported. As noted above, the MGE case did not state that the “DMCA is limited to guarding access controls only to the extent that circumvention would violate the copyright rights of the copyright owner”. Moreover, Prof. Geist’s statement is not complete. It carefully avoids the legislative history of the provisions in issue and fails to point out that the decision, which can still be subject to an en banc review and a cert motion to the US Supreme Court, diverges from the other leading cases decided under the DMCA and the administrative precedent under U.S. law.

According to the Court, “Plaintiffs’ power to control their rights has been so compromised by the means through which [Defendants] encouraged end users to infringe (digital files plus the internet) that the inducement amounts to irreparable harm.” Further, “it is axiomatic that the availability of free infringing copies of Plaintiffs’ works through Defendants’ websites irreparably undermines the growing legitimate market for consumers to purchase access to the same works.”

The Court also re-iterated its previous finding that “strongly suggests that some 2.5 million United States citizens visited Defendants’ websites each month” and that “at one point, Defendants’ websites were accessed over 50 million times from the United States in a single month.” The Court had already also found that Defendants’ “websites are used overwhelmingly for copyright infringement, with upwards of 95% of all dot-torrent files downloaded from Defendants’ websites corresponding to works that are infringing or at least highly likely to be infringing.”

The Court also based its order, among other things, on its conclusions that Isohunt was likely to continue to induce copyright infringement because it’s “very business model, at its core, depends upon copyright infringement” and it would “financially benefit from further infringement”.

The Court’s order requires Isohunt to block all access to the motion pictures and other works owned by the plaintiffs. The order specifically extends to “the conduct of Defendants wherever they may be found, including without limitation in Canada”.

The Court also clarified that the “injunction covers any acts of direct infringement, as defined in 17 U.S.C. § 106, that take place in the United States.” To the extent  “an act of reproducing, copying, distributing, performing, or displaying takes place in the United States” it is covered by the order. It thus extends to any act of uploading or downloading which takes place in the US. “Each download or upload of Plaintiffs’ copyrighted material violates Plaintiffs’ copyrights if even a single United States-based user is involved in the “swarm” process of distributing, transmitting, or receiving a portion of a computer file containing Plaintiffs’ copyrighted content.”

The full order is set out below.
Isohunt Permanent Injunction

Courts around the world have not tolerated or been willing to countenance online businesses whose core business model involves profiting from facilitating online copyright infringement. The most recent example is LimeWire.

The recording industry just won a major copyright piracy lawsuit in the US against LimeWire, one of the most popular remaining p2p music file sharing services in the US. In the decision released May 11, 2010, a New York District court ruled that LimeWire was liable for the massive infringements facilitated by its services based on inducement, vicarious liability, common law copyright infringement, and unfair competition principles.

The evidence in the case established that 93% of files made available over LimeWire were protected or highly likely to be protected by copyright, and thus not authorized for free distribution through LimeWire. 98.8% of the files requested for download through LimeWire were found to be copyright protected or highly likely copyright protected.

The court held there was “overwhelming evidence that LimeWire engaged in purposeful conduct that fostered infringement” to support liability based on inducement. According to the court the evidenced showed that “LimeWire has engaged in purposeful conduct that fostered infringement, with the intent to foster such infringement. LimeWire  distributes its software LimeWire, and (1) is aware that LimeWire’s users commit a substantial amount of copyright infringement; (2) markets LimeWire to users predisposed to committing infringement; (3) ensures that LimeWire enables infringement and assists users committing infringement; (4) relies on the fact that LimeWire enables infringement for the success of its business; and (5) has not taken meaningful steps to mitigate infringement.”

The evidence showed that LimeWire was making substantial revenues from the infringements it fostered. From 2004 to 2006, LimeWire’s annual revenue “grew from nearly $6 million to an estimated $20 million”.  This growth “depended greatly on LimeWire users’ ability to commit infringement through LimeWire.” By 2003, LimeWire boasted that around two million users accessed the program every month.

The evidence also revealed that LimeWire had not implemented in a meaningful way any of the  technological barriers and design choices that are available to diminish infringement through file-sharing programs, such as hash-based filtering, acoustic fingerprinting, filtering based on other digital metadata, and aggressive user education. The court held, following an earlier decision in the MGM Studios, Inc. v. Grokster, Ltd.  545 U.S. 913 (2005) case, that “Failure to utilize existing technology to create meaningful barriers against infringement is a strong indicator of intent to foster infringement.” According to the court, although a defendant “is not required to prevent all the harm that is facilitated by the technology, it must at least make a good faith attempt to mitigate the massive infringement facilitated by its technology.”

The court found LimeWire vicariously liable the infringements of its users based on substantial evidence that LimeWire “had the right and ability to limit the use of its product for infringing purposes, including by (1) implementing filtering; (2) denying access; and (3) supervising and regulating users.” It did not exercise “any meaningful supervisory control over LimeWire users’ infringing activity, or provided a legitimate reason for its failure to do so.” The evidence also established that LimeWire possessed a direct financial interest in users’ infringing activity. LimeWire users were drawn to LimeWire because the program permitted infringement. LimeWire “profited from its ability to attract infringing users, including through increased advertising revenue and increased sales of LimeWire Pro and authorized music.”

The next step in the case is a hearing on June 1 to schedule the future proceedings in the case. These  are likely to be hearings on the scope of injunctive relief and damages.

The case is significant for a number of reasons. LimeWire is one of the biggest remaining P2P networks still operating in the U.S. Others were either shut down after litigation or, like BearShare and eDonkey, went out of business after reaching settlements with copyright owners.

The case also demonstrates the effectiveness of US law in being able to shut down sites and services that are used predominantly for infringing purposes. The case follows other similar US rulings including rulings in the Napster, Aimster, Grokster, Usenet.com and Isohunt cases.

The court’s ruling on the need for file sharing sites to take meaningful steps to mitigate infringement facilitated by its technology shows that courts are moving in lockstep with many governments in pushing online service providers to cooperate and act in good faith to reduce infringements facilitated by their sites, services, or technologies.

The decision will likely have positive benefits in Canada as LimeWire is a popular p2p technology used for music sharing in this country. The ruling may result in a shift in downloading habits of millions of users who had relied on LimeWire to get music for free, to paying services.

What’s next? Pirate Bay’s appeal of the landmark ruling against it is scheduled to be heard this fall. Meanwhile, Isohunt and its Canadian founder Gary Fung, after being found liable for infringement in the US, await their fate as a US district court judge deliberates on the scope of the permanent injunction to be made against them.

The tentative order contains the judge’s ruling as to why the Court intends to grant a permanent injunction.  In summary, the Court stated that

• The “Defendants’ inducement liability is overwhelmingly clear”.
• The Plaintiffs established irreparable harm in three ways: (1) the Defendants (Fung and isoHunt) could not compensate the Plaintiffs for the “staggering volume of infringement”; (2) the distribution of copyrighted works facilitated by IsoHunt result in unstoppable and near-instantaneous  infringements throughout the computer-literate world: and (3) the “availability of  free infringing copies of the Plaintiffs’ works…irreparably undermines the growing legitimate market for consumers to purchase access to the same works”.
• There is no adequate remedy other than to grant an injunction. The “infringements are a continuing threat, making remedies at law insufficient to compensate for Plaintiffs’ injuries”.
• IsoHunt  would continue to infringe without being enjoined because its “very business model, at its core, depends on copyright infringement, and Defendants would financially benefit from further infringement”
• Since the Court’s order of December 21, 2009, IsoHunt  has “not taken steps to mitigate the infringement”.

The tentative order would enjoin IsoHunt from, among other things, facilitating infringement of any present or future works in which any plaintiff (or any parent, affiliate, or subsidiary of a plaintiff) owns the US copyright and which the Plaintiffs have identified to IsoHunt by title.

The Judge set a briefing schedule. The last brief is due April 12, 2010. A final judgment is expected shortly thereafter.

March was also a bad month for other entities engaging in acts that facilitate infringement. Earlier this week, a UK court found Newzbin liable for authorizing and inducing copyright infringement and granted an injunction against that site. Just before that a US court enjoined a website which was found to have been selling counterfeit Louis Vuitton merchandise on trademark and copyright grounds. Last week an Italian Pirate Bay proxy site was closed down by an Italian court.

To round off a busy month, last week the EU Court of Justice also ruled that Google’s use of AdWords was not infringing, but that advertisers’ use thereof could be.

In the course of reaching this decision, the court made a number of important rulings about the liability arising from the use of BitTorrent networks including the following:

• Seeders and peers that make music available for sharing are infringers under Australia’s making available right.
• The transmission of copyright files as part of a BitTorrent swarm constitutes a transmission (communication) to the public by participants in the stream and is infringing.
• A peer that downloads a copyright file over an unauthorized BitTorrent network infringes the reproduction right of the copyright owner.
• There can be liability for the transmission over a BitTorrent network even if some part of the transmission occurs outside of Australia.

The court also strongly suggested that operators of BitTorrent sites would be liable for copyright infringement for having authorized infringement.

As noted above, the court held that in the circumstances of the case, an ISP that simply provides internet connectivity to subscribers does not by that act alone authorize the subscriber’s infringing activity.

The result of the case has left many Australians thinking that some solution to stemming illegal file sharing is necessary. One solution being discussed is an industry wide code of practice between ISPs and content owners. The establishment of a code would have legal effect as it is an express factor in the Australian Copyright Act for determining whether a person authorizes an infringement.

Another solution being discussed is a state sanctioned graduated response system. The Sydney Morning Herald just published an article, Markets and laws failing in face of net piracy, pointing out that there was a real problem to be addressed and that something needed to be done. The article put it this way:

“In his ruling last week, Justice Dennis Cowdroy noted this was the first case of its type in the world, with global ramifications. The illegal downloading of movies, TV programs and music on a large scale was not disputed…

While many revel in the status quo – an illegal but uncontrollable free-for-all – the ruling sent a chill through the film, television and music industries, and indeed all holders of downloadable intellectual property. Copyright holders can and have sued individual users, but illegal file sharing is so pervasive that they could go broke trying to plug all the holes.

A High Court appeal is likely because of the impact of the case. It goes to the heart of global movie, TV and music distribution, which in its prime was a system of astonishingly profitable cartels. However, ISPs’ viability would be at risk, too, if they were to be liable for all independent user activities. The court ruling confirms that the system for protecting copyright and intellectual property is broken; the law has failed to keep pace with the internet.

Content providers are entitled to look to governments for a legislative answer, although great care must be taken not to trample online freedom. Britain and France are among countries considering a ”three strikes” rule to force ISPs to warn serial offenders against illegal downloads, with eventual termination of their accounts. The problem is that internet access is seen as a basic right in modern society.

Still, if illegal downloading of ”free” content continues unabated, everyone will suffer the consequences. Generating high-quality content involves costs, which are often considerable, and if creators of content cannot make money the flow will cease. This applies whether the content is film, television, music or, indeed, journalism. The twin legislative and market failures challenge content providers and users alike. Greed, whether for profits or ”free” material, may kill the goose that lays the golden egg.

Both the law and business models must evolve to take account of the new means of distribution and user expectations, so material becomes legitimately available online. That may require lower prices offset by higher sales volumes. The music industry has begun to embrace a download model. There are no easy answers, and no law can provide them. The one certainty is that any business that clings to the past and resists the new realities of an online world will be history.”

The study monitored piracy for 913 popular books across the most popular 25 file hosting sites starting in October 2009 for a period of 90 days. More specifically, the study captured the number of successful downloads completed for each of the 913 titles as reported on four file hosting sites that made the download data available (4shared.com, scribd.com, wattpad.com and docstoc.com). Across these four sites, a total of 3.2 million downloads occurred. Across the top 25 one-click hosting sites, a total download figure of over 9 million copies was projected using the 36.4% share of online file downloading sites that the four above-mentioned sites represent.

On average, nearly 10,000 copies of every book published are downloaded for free, led by titles in the Business and Investing genre, which averaged over 13,000 free downloads per title.

According to Attributor, the retail value of these 9 million copies was calculated to reach $380 million. (Each book’s retail price and category/genre information was collected from Amazon.com.) The 913 titles in the study represented works from publishers totalling 13.5% of the U.S. book publishing market. Projecting this $380 million value to the entire industry would, according to the study, result in a total potential piracy figure of $2.8 billion.

The study did not attempt to quantify the actual losses to the book publishing industry. To do so the study would have had to make a determination of how many free downloads might have otherwise resulted in a sale. So we can’t automatically conclude that there would be a lost sale for each download.

However, we also can’t conclude that even the $2.8 billion figure represents the retail value of all online piracy in the book publishing industry. As noted above, the study only focused on illegal file sharing on hosted sites. It did not include the file sharing of books over other online file sharing networks and services such as p2p networks. The study also did not take into account many other popular offline digital methods of copying books including unlicensed copying over closed or proprietary networks including educational networks or unauthorized copying by copy shops.

Operators of bittorrent sites like isoHunt often claim they are nothing but content neutral search engines like Google. The Isohunt court disagreed holding, based on uncontested expert evidence, that approximately 95 percent of all files made accessible through Isohunt were infringing or highly likely to be infringing.

The plaintiffs had claimed that Fung was liable for the direct infringement of his sites’ users based on three secondary liability theories: inducement to infringe, material contribution to infringement, and vicarious liability. The first two theories (inducement and material contribution) are known collectively in the US as “contributory liability.” Despite the analytical similarities between the inducement and material contribution theories, some US courts have held that inducement and material contribution are distinct theories of contributory liability through which defendants can be found liable.

Generally, inducement requires that the defendant has undertaken purposeful acts aimed at assisting and encouraging others to infringe copyright. By contrast, material contribution (in the context of computer system operators) applies if the defendant “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.” The third theory, vicarious liability, is similar to contributory liability but includes some contours that differ from these other theories of liability. A defendant infringes vicariously by profiting from direct infringement while declining to exercise a right to stop or limit it.

The Isohunt court premised its liability on the inducement doctrine not finding it necessary to consider the other two theories.

An interesting issue in the case was whether the US court had subject matter jurisdiction over the infringement given that Fung’s four web sites were hosted in Canada. The court held it did based on the well established principle in US law that in the context of secondary liability, an actor may be liable for activity undertaken abroad that knowingly induces infringement within the United States.  Once a plaintiff has established that an act of infringement has taken place within the United States, defendants may be held liable for their conduct that constitutes inducement, material contribution, or vicarious infringement, even if Defendants’ conduct took place abroad.

Fung had argued that to establish acts of direct infringement that are subject to the US copyright law, the plaintiff has to provide evidence that both the transferor and the transferee are located in the United States. The court rejected this contention holding that proof of either acts of uploading or downloading a file in the US are all that is required. According to the court:

“However, United States copyright law does not require that both parties be located in the United States. Rather, the acts of uploading and downloading are each independent grounds of copyright infringement liability. Uploading a copyrighted content file to other users (regardless of where those users are located) violates the copyright holder’s § 106(3) distribution right. Downloading a copyrighted content file from other users (regardless of where those users are located) violates the copyright holder’s § 106(1) reproduction right… Accordingly, Plaintiffs need only show that United States users either uploaded or downloaded copyrighted works; Plaintiffs need not show that a particular file was both uploaded and downloaded entirely within the United States.”

The court found that there was overwhelming evidence of acts of direct infringement in the US.

The argument that bittorrent sites like Isohunt are nothing but content neutral search engines like Google was also categorically dismissed by the court holding that “the evidence of Defendant’s intent to induce infringement is overwhelming and beyond reasonable dispute”. This finding was backed up by detailed findings about messages to users, assistance to users, and the implementation of technical features, which were all intended to induce direct infringement by site users. The court also found that the defendants’ business model depended on massive infringing uses of the plaintiffs’ copyright materials.

The defendants had also relied on three safe harbours provided under the DMCA to exclude their liability; namely, the safe harbours available to providers of information location tools (ILTs); to mere conduits; and to providers of hosting services. These exclusions were carefully drafted to ensure that they applied to innocent intermediaries without creating the inadvertent consequence that they could be relied on by unauthorized file sharing sites and services. The court held they did not apply for several reasons.   

First, the DMCA safe harbours were inapplicable because Fung was liable for secondary infringement. Since the safe harbours were intended for use by only innocent intermediaries, they were not available because Fung was found to have actively induced infringement. According to the court:

“The Digital Millennium Copyright Act provides affirmative defenses for providers of certain internet services. In many ways, the Digital Millennium Copyright Act is simply a restatement of the legal standards establishing secondary copyright infringement – in many cases, if a defendant is liable for secondary infringement, the defendant is not entitled to Digital Millennium Copyright Act immunity; if a defendant is not liable for secondary infringement, the defendant is entitled to Digital Millennium Copyright Act immunity. The two sets of rules do not entirely overlap, but this framework is helpful for understanding the Act’s statutory text and structure.”

(This finding by the court is consistent with the approach taken by the Supreme Court of Canada in the SOCAN Tariff 22 case which held that the intermediary exception in para 2.4(1)(b) of the Copyright Act applies only to innocent intermediaries.)

Second, the DMCA safe harbours were unavailable because Fung had not met the statutory condition that requires US service providers to do what they can reasonably be asked to do to prevent the use of their service by repeat infringers, if they want to rely on the DMCA safe harbours.

Third, Fung was unable to rely on the DMCA safe harbours because he could not inadvertently fit within their intentionally specific provisions. For example, under the DMCA a provider of “information location tools”  must satisfy the three conjunctive requirements to apply; the defendant (1) must not know or have reason to know of infringing activities, or does not remove infringing materials upon receipt of such knowledge; (2) does not profit from infringement where it has the power to control the infringement; and (3) upon receiving notice (in the statutorily prescribed manner) from the copyright holder, removes the infringing material. Fung was not able to satisfy any of these requirements. Fung was also unable to rely on the hosting or conduit exceptions because, according to the court, no infringing materials were posted on or passed through defendants’ systems.

The  Isohunt case should be of particular interest to Canadians as we assess the amendments needed to our laws to enable Canadians to stem online infringements facilitated by unauthorized Canadian file sharing sites and services. It is apparent from the opinion in the case that key legal doctrines played a major role in the findings of infringement. In particular, the following factors were central to the court’s findings of liability: 

1. Liability for direct infringement based upon acts of uploading (e.g., making files available for distribution such as required by the WCT and WPPT making available and distribution rights) and downloading (creating reproductions of files).
2. Existence of robust doctrines of secondary liability such as inducement.
3. Service provider safe harbours that (a) are narrowly tailored, (b) protect only legitimate innocent intermediaries e.g., ISPs who do not participate in or induce infringement by users of their services, and (c) do not apply unless the service providers act responsibly and do what they can reasonably be asked to do to prevent the use of their service by repeat infringers.

“…defendant shall be, and hereby is, enjoined from directly or indirectly infringing plaintiffs’ rights under federal or state law in any sound recording, whether now in existence or later created, that is owned or controlled by plaintiffs (or any parent, subsidiary, or affiliate record label of plaintiffs) (“Plaintiffs’ Recordings”), including without limitation by using the Internet or any online media distribution system to reproduce or distribute any of Plaintiffs’ Recordings, except pursuant to a lawful license or with the express authority of plaintiffs. Defendant also shall destroy all copies of Plaintiffs’ Recordings that defendant has downloaded onto any computer hard drive or server without plaintiffs’ authorization and shall destroy all copies of those downloaded recordings transferred onto any physical medium or device in defendant’s possession, custody, or control.”

The order in the case, is the culmination of significant litigation in which the defendant called into question whether file sharing over p2p systems could be fair use and whether statutory damages could be recovered for non-commercial file sharing.

Earlier this month US district court judge Gertner rejected the defendant’s fair use defense that all non-commercial file sharing was a fair use on the ground that file sharing over p2p networks hurt rights holders. Sony BMG  Music Entertainment v Tenenbaum, 2009 WL 4547019 (D.Mass. Dec 7, 2009).

The defendant, Joel Tenenbaum, was accused of using file-sharing software as a college sophomore to download and distribute 30 copyrighted songs belonging to the plaintiffs. His defense was that his file sharing constituted a “fair use” under the U.S. Copyright Act.

The Court, deeply concerned by “the upheaval of norms of behavior brought on by the internet, did everything in its power to permit Tenenbaum to make his best case for fair use.” The court had made clear that it was prepared to consider the defense and expressed the view that  fair use defense might be made out in specific fact situations such as: file sharing for the purposes of sampling music prior to purchase where the file e.g. an MP3 file, is deleted after sampling; space-shifting to store legally purchased music more efficiently; or use of new file-sharing networks before digital media could be purchased legally.

The defendant, however, eschewed a modest exception and “mounted a broadside attack that would excuse all file sharing for private enjoyment.” He argued that all a defendant needs to show is that he did not make money from the files he downloaded or distributed-i.e., that his use was “non-commercial”.

The court categorically rejected that such a sweeping fair use defense was available. According to the court “ It is a version of fair use so broad that it would swallow the copyright protections that Congress created, defying both statute and precedent.” Allowing fair use for non-commercial file sharing would be harmful to rights holders and undermine legitimate markets for sound recordings. According to the court:

“The following details were not in genuine dispute: (1) the main purpose of Tenenbaum’s file sharing was his own private enjoyment and that of his friends, that is, the very use for which the artist or copyright holder is entitled to expect payment as a reward; (2) he downloaded entire songs, although not entire albums of music; (3) he did not transform the 30 works at issue (i.e., turn them into his own creative work); (4) his file sharing spanned more than four years and several different software platforms, both before and after this activity was detected in August 2004; and (5) during that time, his file-sharing software made more than 800 songs available to other Kazaa users to download.See Pls.’ Statement of Facts at 1-4, 6. His activity continued notwithstanding changes in the case law, making it clear that the conduct was not protected; by 2001, for example, the Ninth Circuit had held that peer-to-peer file sharing was not fair use. See A & M Records, Inc. v. Napster, Inc ., 239 F.3d 1004, 1012-19 (2001). And his activity continued even after digital music was lawfully available; the iTunes Music Store, which made authorized digital downloads widely available, debuted in April 2003, approximately 15 months before Tenenbaum’s computer was detected on the Kazaa network. See Apple Launches the iTunes Music Store, http://www.appl e.com/pr/library/2003/apr/28musicstore.html (last visited Dec. 4, 2009). Tenenbaum did not contest these facts at summary judgment; he argued, instead, that they just did not matter.”

“The only fair use factor on which the defendant offered any challenge to was the effect of his file sharing on the potential market for or value of the copyrighted works. See 17 U.S.C. § 107(4)…. In any event, the issue is not the impact on the universe of artistic creation or whether record companies are making enough money in Tenenbaum’s view. The issue is the impact of file sharing on the market for these specific works. And in this regard, the law and the evidence are clear: A court must consider “ ‘whether unrestricted and widespread conduct of the sort engaged in by the defendant … would result in a substantially adverse impact on the potential market’ for the original.”…”

“There can be no question that on this record continuous, high-volume file sharing-offering exact duplicates to millions of peer-to-peer users for free-would negatively affect the market for these copyrighted works. While the Court recognizes that not every download would represent a lost sale, it is clear that some portion of paying consumers would shift to free downloads if this activity were considered a fair use. Given the record, the plaintiffs’ factual presentation, and the defendant’s extraordinarily meager response, the Court was obliged to find as a matter of law that Tenenbaum’s use would negatively impact the potential market for the downloaded works if it were widespread.”

“Although the purpose of Tenenbaum’s file sharing may not have been “commercial” in any classic sense, as noted above, from a consequential perspective the difference becomes harder to make out. The Court sees little difference between selling these works in the public marketplace and making them available for free to the universe of peer-to-peer users. If anything, the latter activity is likely to distribute even more copies-and therefore result in a bigger market impact-because there is no cost barrier at all. It is difficult to compete with a product offered for free. The plaintiffs provide evidence that the widespread availability of free copies of copyrighted works on the internet has decreased their sales revenue, a market reality that other courts have credited.

“Even if every download does not represent a lost sale, as the Court recognizes, it is plain that consumers who regularly pay for music would shift to free downloads if given the chance. Indeed, that is the very premise of Tenenbaum’s sweeping argument-that this music should be free to individuals simply because it has “gone digital.” He all but concedes the lost sales that would result from his version of fair use. He claims that copyright law does not protect what he labels “an outdated business model” and that the plaintiffs have other means of profiting from these works. What he seems to be arguing is that, even in the era of file sharing, the plaintiffs still make a enough money from their copyrights. But the sufficiency of the plaintiffs’ profits is not the measure of fair use, nor is Tenenbaum’s view of what amount of profits are “enough.” Congress has not capped the revenue that a copyright holder may derive from its monopoly, and that is indeed a quintessential legislative judgment.”

“To be sure, some authorities suggest that the “network effects” of making these works available for free may in fact enhance their overall value, especially for lesser-known artists, by increasing buzz and publicity… That may be so in certain mixed systems, where some free distribution feeds demand for legitimate online sales. But Tenenbaum’s version of fair use would destroy even that equilibrium. It would simply eliminate the market for digital downloads among individual consumers by transforming all file sharing for private enjoyment into fair use. Who would continue to use the iTunes Store or its equivalents, under the circumstances? The Copyright Act grants the plaintiffs an exclusive right to distribute these works; file sharing effectively displaces that right, and the market it represents, by offering the same works for free.

Prior to this decision, Tenenbaum had also argued that statutory damages were not available for non commercial p2p file sharing. Capital Records, Inc. v. Alaujan 626 F.Supp.2d 152 (D.Mass. Jun 15, 2009)  He had argued that such damages were so excessive that they violated his right to due process. The court also rejected this defense.

Mininova was the world’s second most popular unauthorized BitTorrent site. It facilitated infringement on a massive scale, with more than 10 billion downloads. Its demise follows Pirate Bay which was also ordered shut down following a decision by a Swedish court this past April which found Pirate Bay’s operators criminally responsible for copyright infringement.

 After Pirate Bay was ordered shut down and following the introduction of new anti-piracy legislation in Sweden, there was a spike in sales of music from legitimate sources in Sweden. In the first nine months of 2009 digital music sales in Sweden increased by 80% and there was a nine per cent increase in physical sales. A market research firm also found that 60% of users aged 15-74 had reduced the amount of file sharing they did since the Pirate Bay ruling. We should expect a similar decline in online file sharing and increases in legal sales of music, movies and other digital content with Mininova’s end. Sweden sees legal music sales boost following Pirate Bay case.

The successful litigation against the two most popular worldwide unauthorized BitTorrent sites already has the blogosphere speculating on where the (illegal) alternatives are. Canada has a dubious distinction in this regard. Barrie McKenna pointed this out in an article in the Globe and Mail this fall, The (legal) music fades our for Canadians, saying “Canada has earned a dubious distinction as a world hub for illegitimate file-sharing websites and a leader in Internet piracy.” He concluded, “That hurts Canadians, and most people don’t even know it’s happening.”

The table below shows the 2008 traffic statistics for the top 10 BitTorrent websites. With Pirate Bay and Mininova now both legally prohibited from operating, as shown below, Canada is in the embarrassing position of harbouring 5 of the top 8 remaining unauthorized BitTorrent sites including the new number 1 ranked site, Isohunt.

(Data obtained from Alexa, http://www.alexa.com, or, when unavailable, Compete, http://siteanalytics.compete.com. Hosting/registration data obtained from Domain Tools http://www.domaintools.com/)