One of the Great Unanswered Questions Is Answered!

This is the third post on the recent and important Ninth Circuit opinion in the “Veoh case” (actually styled, UMG Recordings v. Shelter Capital, but we’ll call it “Veoh”). In the first post, we marveled at Universal’s surprising leading argument and worried about the fate of user-created videos of cute kittens. In the last post, we analyzed Universal’s surprisingly weak argument that Veoh had “red flag” knowledge of infringing activity and wondered if Universal hadn’t made things worse for rights holders on that issue.

Universal’s third and final argument fares rather better*, although it, too, ultimately fails. It targeted the financial benefit requirement (which, remember, is really a “no financial benefit” requirement). Recall that there are two prongs to this requirement: (1) the provider not receive a “financial benefit directly attributable to the infringing activity”; and (2) the provider have “the right and ability to control” the infringing activity.

* I still think that Universal would have been better off targeting Veoh’s repeat infringer policy. There’s so much we just don’t know about this requirement. Universal would have had a much better shot at reshaping the law in rights-holders’ favor, and at creating an issue of genuine fact.

The Right to Burn the Place Down Isn’t “Control”

As I discussed way back here, this language is nearly identical to the language courts use to define “vicarious liability,” an important form of secondary liability (i.e., liability arising not from direct infringement but from somehow making the direct infringement possible). One of the great unanswered questions about the DMCA safe harbor was whether the financial-benefit requirement was the equivalent of vicarious liability. This sounds technical, but it’s important. If they are equivalent, then any website operator who commits vicarious liability will automatically be ineligible for safe-harbor protection.

The problem is that operators of a site with user-uploaded content are nearly always in danger of committing vicarious liability. Websites usually receive some sort of benefit from the user-uploaded content (e.g., advertising, or a “draw” for new subscribers, as in the Napster case). The only question is whether the financial benefit is direct enough. In addition, providers have the option of pulling the plug on the whole thing and throw out subscribers, which many courts will regard as enough to constitute control. And, remember, you don’t even need to have knowledge of the infringement to be liable under a theory of vicarious infringement. The classic type of vicarious liability were dance halls that hosted dances at which infringing music was publicly performed. It’s hard to see how websites are much different.

The Ninth Circuit had already commented on this issue once, in the CCBill case, where it assumed, without much analysis, that the financial benefit requirement was the equivalent of vicarious liability. But, as I’ve discussed earlier, there is good reason to believe that Congress intended nothing of the sort.

The Ninth Circuit has now essentially reversed CCBill on this point, holding clearly–and with a good deal of analysis–that the two standards are quite different. The court focused on the second prong of the financial benefit requirement, that the provider have the “right and ability to control” the infringing activity from which it allegedly derived a direct financial benefit.

The court reasoned that the “right and ability to control” meant the ability to stop a specific instance of infringement, as opposed to stopping the means by which the infringement is carried out. To take the example of the dance-hall operator. Under vicarious liability, the operator didn’t need to know that some of the songs the band was going to play would infringe copyright. So long as the operator got a financial benefit and could have stopped the whole performance, that was enough.

Under Veoh’s interpretation of the financial benefit requirement, the operator would have needed to know what songs were going to be played, that certain of them were likely to be infringing, and stop those songs from being played.*

* Just to be clear, I’m using the dance-hall operator as an analogy, to set up a contrast with class vicarious liability. They wouldn’t come under any of the DMCA safe harbors in reality.

In the context of the DMCA safe-harbor scheme, this means–guess what?–having knowledge (either actual or “red flag”) of the infringing activity. And, as we discussed last time, that in turn means receiving a proper DMCA takedown notice.* In this respect, it’s almost the complete opposite of classic vicarious liability, which had no knowledge requirement.

* For some reason, Universal submitted absolutely no DMCA takedown notices to Veoh (though the RIAA did on its behalf–and those were complied with).

To read the financial benefit requirement broadly, the Ninth Circuit argued, would run afoul of the DMCA’s no-duty-to-investigate provision. Without a takedown notice, the only way the operator would know what material to remove is to conduct an investigation, which the operator is spared from having to do under the DMCA.

In addition, the court relied on the legislative history (which I’ve discussed previously here). It also relied on what it saw as an inherent absurdity of, essentially, having the receipt of financial benefit disqualify service providers from DMCA safe-harbor protection:

It is conceivable that Congress [would have] intended that [service providers] which receive a financial benefit directly attributable to the infringing activity would not, under any circumstances, be able to qualify for the subsection (c) safe harbor. But if that was indeed their intention, it would have been far simpler and much more straightforward to simply say as much. The Court does not accept that Congress would express its desire to do so by creating a confusing, self-contradictory catch-22 situation that pits 512(c)(1)(B) and 512(c)(1)(C) directly at odds with one another, particularly when there is a much simpler explanation: the DMCA requires more than the mere ability to delete and block access to infringing material after that material has been posted in order for the [service provider] to be said to have “the right and ability to control such activity.”

(Quoting the trial court opinion in Ellison v. Robertson, 189 F. Supp. 2d 1051 (C.D. Cal. 2002).)

Looking Ahead to YouTube

In light of the effort the Ninth Circuit put into this opinion, the conclusion is inescapable that the court was intending to write a definitive opinion on the subject. One also suspects that the court wished to influence the Second Circuit as it considers the YouTube case.

Now, the Ninth Circuit can only influence the Second Circuit; it cannot control it. For purposes of precedent, these are two different jurisdictions. The Second Circuit is bound to follow only Second Circuit (and Supreme Court) authority.*

* And even then, the Second Circuit can overturn its own precedent, though this happens but rarely.

However, in this case, there isn’t much controlling authority for the Second Circuit to follow (which is surprising considering that it includes New York, home to several music labels). When that’s the case, a circuit court will typically follow (voluntarily, as it were) the precedent of another circuit, unless the other circuit’s precedent is poor or controversial.

This is because disagreements among circuits–known as a “circuit split”–create confusion. The point of federal law is to create uniformity across the nation–the law is the same everywhere in the U.S. But when there is a circuit split, the law is literally different from place to place.*

* Circuit splits greatly increase the likelihood that the Supreme Court will take up a matter, with a view to resolving the split.

Circuit splits between the Second and Ninth Circuits on copyright matters are fairly common, and can be real pain. It encourages parties to rush to the court house in order to secure more favorable litigation. It also requires folks to keep two different standards in mind: If we’re sued in California, the law is X; but if we’re sued in New York, it’s Y. It also makes it difficult for folks affected by copyright law to govern their actions.

Despite the danger of a circuit split, it’s not a certainty that the Second Circuit will rule in favor of YouTube. First of all, the Second Circuit could conceivably reverse YouTube’s victory (which would result in a remand for a trial) without directly contradicting the Veoh decision*. Viacom turned up more evidence of red-flag knowledge than Universal did. There’s also evidence that YouTube deliberately delayed removing infringing content in order to get a bit more mileage out it.

* I’m not sure if that’s because there was more to turn up, or that Viacom was more dogged in pursuing such evidence in discovery.

Also, Veoh isn’t the final word on what constitutes red-flag knowledge. While it certainly raised the ceiling, we still don’t know when red-flag knowledge is achieved. There’s still a lot of room between Veoh and Fung on this issue. The Second Circuit could set it just low enough to catch YouTube but not so low as to contradict Veoh.

The Second Circuit could simply reject the Ninth Circuit precedent. Under normal circumstances, this would be almost unthinkable. The Ninth Circuit precedent is very well established and clearly forms the “leading cases” on the matter of DMCA safe-harbor protection. The issuance of the Veoh opinion makes it just that much harder to ignore the Ninth Circuit, especially because it is so exhaustively researched and reasoned.

But DMCA safe-harbor protection is controversial and high-profile. There are lots of “amici” briefs and academic papers seeking to influence the Second Circuit. As strong as the Veoh decision is, it’s not water-tight. If the Second Circuit really wanted to, it could find an equally legitimate way to interpret the DMCA safe harbor.*

* It’s worth noting that there are, in a sense, two YouTubes on trial: pre- and post-Google. The pre-Google YouTube was clearly run loosely and was keen on building its brand, in part, by hosting infringing content. The post-Google YouTube is completely different. A perfectly legitimate result could be that YouTube is potentially liable for the “bad old days,” but not so much going forward. Although lots of folks on the technology side would be upset at that result, it’s one that Google could easily manage.

As I’ve said before, prediction is a mug’s game, and I don’t like to make them. But I’d say that the Veoh decision, being issued when it did, probably hurt the chances of reversal in the YouTube case by about 20%.

Thanks for reading!

Rick Sanders

Rick is an intellectual-property litigator. He handles lawsuits, arbitrations, emergency injunctions and temporary restraining orders, opposition and cancellation proceedings, uniform dispute resolution proceedings (UDRPs), pre-litigation counseling, litigation avoidance, and other disputes, relating to copyrights, trademarks, trade secrets, domain names, technology and intellectual-property licenses, and various privacy rights. He has taught Copyright Law at Vanderbilt University Law School. He co-founded Aaron | Sanders with Tara Aaron-Stelluto in 2011.