Notes & Comment
Vol. 2010, No. 1
(View Archives)
Copyright Law
Investor/Director Liability for Secondary Infringement
Copyright law imposes two types of infringement liability: "primary" (or direct) infringement and "secondary" (or indirect) infringement. There are at least three theories of "secondary" copyright infringement: contributory infringement, vicarious infringement and inducement to infringe. Each theory of secondary copyright infringement has its unique elements, but a defendant cannot be held liable under any theory of secondary infringement unless there's a corresponding act of primary copyright infringement. In other words, a plaintiff must allege and prove direct copyright infringement by one defendant in order to also allege and prove secondary copyright infringement by a second defendant.
A recent federal district court case in California considered when investors and directors might be liable for secondary copyright infringement if their company has allegedly engaged in direct infringement. The analysis is interesting and merges business law with copyright law -- clashing concepts of corporate finance and corporate governance, on the one hand, and copyright infringement, on the other.
UMG Recordings, Inc. v. Veoh Networks, Inc.
In UMG Recordings, Inc. v. Veoh Networks, Inc., 2009 U.S. Dist. LEXIS 14955 (C.D. Cal. (February 2, 2009)), the plaintiffs were owners of certain sound recordings. They filed a copyright infringement action against Veoh Networks, a privately held website company, alleging that Veoh's website allowed the plaintiffs' copyrighted material to be uploaded to and downloaded from its website (the "primary" infringement). The plaintiffs also sued Veoh's investors, who controlled the company and served on its board of directors (the "secondary" infringement).
Early in the case, the Veoh investors/directors moved to dismiss the secondary copyright infringement claims filed against them by UMG Recordings. The trial court granted their motion, holding that each of the plaintiffs' allegations of copyright infringement against the Veoh investor/directors -- for contributory infringement, for vicarious infringement and for inducing infringement -- was insufficient to state a claim of secondary copyright infringement.
A. Contributory Copyright Infringement
"To be liable for contributory copyright," the Veoh court wrote, "the defendant must have knowledge or reason to have knowledge of direct infringement and must provide material assistance to the infringer", citing A & M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1019-22 (9th Cir. 2001). In short, knowledge and material support are required for contributory copyright infringement.
While the plaintiffs alleged that the investor/directors knew of Veoh's infringement, the trial court failed to see the required material support. Board membership, alone, wasn't enough: "To allow for derivative copyright liability merely because of [Board] membership could invite expansion of potential shareholder liability for corporate conduct, without meaningful limitation." 2009 U.S. Dist. LEXIS 14955, at 10. Furthermore, exercising shareholder voting power to select members of the Board is not sufficient material support to impose contributory liability. Id, at 11. Finally, the allegation that Board members, acting in their supervisory capacity to govern the company, was insufficient for imposing contributory liability upon them. Id, at 11.
B. Vicarious Copyright Infringement
The trial court next considered whether the Veoh investors/directors could be liable for vicarious copyright infringement. "A party may be vicariously liable," wrote the court, "if it has the right and ability to supervise the infringing activity, and has a direct financial interest in the infringing activities." 2009 U.S. Dist. LEXIS 14955, at 13-14. Thus, vicarious liability depends on having control and a direct financial interest.
Whether a case can be made that controlling investor/directors have sufficient control of the infringing activity, the Veoh corporate insiders didn't have a direct financial interest in the infringing activity. The court acknowledged several cases of vicarious copyright infringement that potentially imposed secondary liability on corporate insiders, but those cases, the court said, involved direct financial benefit received by the insiders as a result of the infringing activity, in the form of user fees or by payments by advertisers. Here, there was no allegation that direct financial benefit was obtained by the Veoh investor/directors: no fees were paid to them by users or advertisers, nor were dividends derived from the infringing activity.
Moreover, the court wrote, "'profit from their investments through the sale of Veoh to a potential acquiring company or through a public offering' [is a] financial benefit ... too far removed from the alleged infringement to be considered a "direct" financial interest." Id, at 17. In other words, active board membership and the possibility of eventually reaping a return on investment when the business is sold -- those things alone won't support a claim for vicarious copyright infringement against corporate insiders.
This same outcome was reached in another recent corporate insider-copyright infringement liability case. See, Dongxiao Yue, et al. v. Chordiant Software, Inc., et al., 2009 U.S. Dist. LEXIS 118824 (N.D. Cal. (December 21, 2009)). There, the trial court summarized the issue as follows:
The essential aspect of the "direct financial benefit" inquiry [in a vicarious infringement -- corporate insider case] is whether there is "a causal relationship between the infringing activity and any financial benefit a defendant reaps," irrespective of the magnitude of the benefit. Ellison v. Robertson, 357 F.3d 1072, 1079 (9th Cir. 2004). There must be an obvious and direct financial interest in the exploitation of copyrighted materials. Adobe Sys. Inc. v. Canus Prods., Inc., 173 F. Supp. 2d 1044, 1052 (C.D. Cal. 2001). The mere fact that a defendant is an officer and shareholder of an infringing corporation is "too attenuated" to show a "'direct' financial interest in the exploitation of copyrighted materials." Softel, Inc. v. Dragon Med. and Scientific Commc'ns, Inc., 118 F.3d 955, 971 (2d Cir. 1997)." Id., 2009 U.S. Dist. LEXIS 118824 at 22.
C. Inducement to Infringe Copyright
Secondary liability of inducement to infringe copyright is a relatively new theory of copyright liability, involving distribution of a device with the object of promoting its use to infringe copyright, as demonstrated by clear conduct or other steps taken to foster infringement. See, Metro-Goldwyn-Mayer Studios Inc., et al. v. Grokster, Ltd., et al., 545 U.S. 913, 936-37 (2005). It requires two elements: distribution and evidence of a purpose to promote copyright infringement.
This theory didn't apply to Veoh's corporate insiders either. For example, said the Veoh court, the plaintiffs didn't allege that the investor/directors encouraged any Veoh website users to infringe. Nor did the plaintiffs allege that the investor/directors encouraged Veoh to infringe directly. Without such allegations, the plaintiffs could level no claim of inducement to infringe against the corporate insiders.
Summary and Conclusion
As theories of secondary copyright liability expand, the scope and range of actors against whom such theories are applied also continue to expand. The Veoh case and others like it make clear, however, that claims of secondary copyright infringement against corporate insiders are sustainable only if there's some substantial nexus between the primary infringing activity and financial benefits received by the insider, or a strong connection between a powerful insider and the role it plays in the infringement. Mere status as a controlling corporate insider will not, alone, support a claim of secondary copyright infringement against the controlling corporate insider.
© Matthew Joseph 2010. Law Offices of Matthew Joseph, San Mateo, California, practices in the areas of intellectual property licensing, commercial real estate leasing, corporate formations and business transactions. No legal advice is intended by the information provided herein and recipients should independently consult counsel before taking any action related to this subject matter.