Chapter 10: Indirect Infringement

Under the doctrine of “indirect” copyright infringement (sometimes referred to as “secondary liability”), a court can, under certain circumstances, hold a party liable for the infringing acts of another. The doctrine of indirect copyright infringement arises solely out of judge-made law, finding no explicit support in the Copyright Act; nonetheless, it is well established and has been endorsed by the U.S. Supreme Court. The doctrine plays an important role in cases in which a copyright owner does not have a viable cause of action against any direct infringer, often because the direct infringer is difficult to identify or judgment-proof, i.e., a party that is financially insolvent, or whose income and assets cannot be obtained in satisfaction of a judgment. For example, in the first case presented below, Fonovisa v. Cherry Auction, the defendant is the operator of a flea market. The flea market operator is not directly infringing any copyright, but vendors at the flea market are, and as a practical matter it makes more sense for the copyright owner to sue the flea market operator than to attempt to go after the vendors directly.

The case law has established two distinct forms of indirect copyright infringement, and both are successfully asserted in the following case. These two forms of indirect copyright infringement are referred to as (1) vicarious liability, and (2) contributory liability. In order for a copyright plaintiff to prevail on either of these theories of liability, the plaintiff generally needs to establish two elements (although this can vary somewhat from circuit to circuit).

In the case of vicarious liability, the two elements are often stated as:

1. 1. the right and ability to control the infringing activity; and
   2. direct financial benefit from the infringement.

In the case of contributory liability, the two elements are often stated as:

1. 1. materially contributing to, inducing, or causing another party’s infringing conduct; and
   2. knowledge of the infringing activity.

Importantly, in order to prevail on either theory of indirect infringement, the plaintiff must establish that copyright infringement did occur, i.e., that a direct infringer did infringe the copyright.

Oftentimes, a party that is liable under one theory will also be liable under the other. But the two forms of indirect infringement are far from redundant, and there are cases where only one will be found applicable. For example, in Shapiro, Bernstein and Co. v. H.L. Green Co., a landmark case on vicarious liability discussed below in Fonovisa, the owner of a department store was found vicariously liable for its concessionaire’s sale of counterfeit goods, but could not have been found liable for contributory infringement because the department store owner was unaware of the concessionaire’s infringement. Conversely, in a more recent case that also appears later in this casebook, Sony Music Ent. v. Cox Commc’ns, an internet service provider (ISP) was found liable for contributory infringement but not for vicarious infringement because the ISP did not profit from its subscribers’ acts of infringement, a legal prerequisite for vicarious liability.

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Some things to consider when reading Fonovisa:

1. The question for the court in this case is whether a swap meet (flea market) operator can be held liable for the infringing conduct of vendors who are selling (i.e., distributing) illegal copies of music CDs. Pay particular attention to the court’s analysis for both forms of indirect infringement, vicarious and contributory.
2. The court’s discussion and analysis of some seminal indirect infringement decisions, Shapiro and Gershwin.
3. The discussion of the dichotomy between the “landlord-tenant model” vs. the “dance hall model,” and the court’s use of analogy.

Fonovisa, Inc. v. Cherry Auction, Inc.

76 F.3d 259 (9th Cir. 1996)

SCHROEDER, Circuit Judge:

This is a copyright and trademark enforcement action against the operators of a swap meet, sometimes called a flea market, where third-party vendors routinely sell counterfeit recordings that infringe on the plaintiff’s copyrights and trademarks. The district court dismissed on the pleadings, holding that the plaintiffs, as a matter of law, could not maintain any cause of action against the swap meet for sales by vendors who leased its premises. We reverse.

Background

The plaintiff and appellant is Fonovisa, Inc., a California corporation that owns copyrights and trademarks to Latin/Hispanic music recordings. Fonovisa filed this action in district court against defendant-appellee, Cherry Auction, Inc., and its individual operators (collectively “Cherry Auction”). For purposes of this appeal, it is undisputed that Cherry Auction operates a swap meet in Fresno, California, similar to many other swap meets in this country where customers come to purchase various merchandise from individual vendors. The vendors pay a daily rental fee to the swap meet operators in exchange for booth space. Cherry Auction supplies parking, conducts advertising and retains the right to exclude any vendor for any reason, at any time, and thus can exclude vendors for patent and trademark infringement. In addition, Cherry Auction receives an entrance fee from each customer who attends the swap meet.

There is also no dispute for purposes of this appeal that Cherry Auction and its operators were aware that vendors in their swap meet were selling counterfeit recordings in violation of Fonovisa’s trademarks and copyrights. Indeed, it is alleged that in 1991, the Fresno County Sheriff’s Department raided the Cherry Auction swap meet and seized more than 38,000 counterfeit recordings. The following year, after finding that vendors at the Cherry Auction swap meet were still selling counterfeit recordings, the Sheriff sent a letter notifying Cherry Auction of the on-going sales of infringing materials, and reminding Cherry Auction that they had agreed to provide the Sheriff with identifying information from each vendor. In addition, in 1993, Fonovisa itself sent an investigator to the Cherry Auction site and observed sales of counterfeit recordings.

Fonovisa filed its original complaint in the district court on February 25, 1993, and on March 22, 1994, the district court granted defendants’ motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). In this appeal, Fonovisa does not challenge the district court’s dismissal of its claim for direct copyright infringement, but does appeal the dismissal of its claims for contributory copyright infringement, vicarious copyright infringement and contributory trademark infringement.

Although the Copyright Act does not expressly impose liability on anyone other than direct infringers, courts have long recognized that in certain circumstances, vicarious or contributory liability will be imposed. Similar principles have also been applied in the trademark field. We analyze each of the plaintiff’s claims in turn.

Vicarious Copyright Infringement

The concept of vicarious copyright liability was developed in the Second Circuit as an outgrowth of the agency principles of respondeat superior. The landmark case on vicarious liability for sales of counterfeit recordings is Shapiro, Bernstein and Co. v. H.L. Green Co., 316 F.2d 304 (2d Cir.1963). In Shapiro, the court was faced with a copyright infringement suit against the owner of a chain of department stores where a concessionaire was selling counterfeit recordings. Noting that the normal agency rule of respondeat superior imposes liability on an employer for copyright infringements by an employee, the court endeavored to fashion a principle for enforcing copyrights against a defendant whose economic interests were intertwined with the direct infringer’s, but who did not actually employ the direct infringer.

The Shapiro court looked at the two lines of cases it perceived as most clearly relevant. In one line of cases, the landlord-tenant cases, the courts had held that a landlord who lacked knowledge of the infringing acts of its tenant and who exercised no control over the leased premises was not liable for infringing sales by its tenant. In the other line of cases, the so-called “dance hall cases,” the operator of an entertainment venue was held liable for infringing performances when the operator (1) could control the premises and (2) obtained a direct financial benefit from the audience, who paid to enjoy the infringing performance.

From those two lines of cases, the Shapiro court determined that the relationship between the store owner and the concessionaire in the case before it was closer to the dance-hall model than to the landlord-tenant model. It imposed liability even though the defendant was unaware of the infringement. Shapiro deemed the imposition of vicarious liability neither unduly harsh nor unfair because the store proprietor had the power to cease the conduct of the concessionaire, and because the proprietor derived an obvious and direct financial benefit from the infringement. The test was more clearly articulated in a later Second Circuit case as follows: “even in the absence of an employer-employee relationship one may be vicariously liable if he has the right and ability to supervise the infringing activity and also has a direct financial interest in such activities.” Gershwin Publishing Corp. v. Columbia Artists Management, Inc., 443 F.2d 1159, 1162 (2d Cir.1971). See also 3 Melville Nimmer & David Nimmer, Nimmer on Copyright § 1204(A)[1], at 1270–72 (1995).

The district court in this case agreed with defendant Cherry Auction that Fonovisa did not, as a matter of law, meet either the control or the financial benefit prong of the vicarious copyright infringement test articulated in Gershwin. Rather, the district court concluded that based on the pleadings, “Cherry Auction neither supervised nor profited from the vendors’ sales.” In the district court’s view, with respect to both control and financial benefit, Cherry Auction was in the same position as an absentee landlord who has surrendered its exclusive right of occupancy in its leased property to its tenants.

This analogy to absentee landlord is not in accord with the facts as alleged in the district court and which we, for purposes of appeal, must accept. The allegations below were that vendors occupied small booths within premises that Cherry Auction controlled and patrolled. According to the complaint, Cherry Auction had the right to terminate vendors for any reason whatsoever and through that right had the ability to control the activities of vendors on the premises. In addition, Cherry Auction promoted the swap meet and controlled the access of customers to the swap meet area. In terms of control, the allegations before us are strikingly similar to those in Shapiro and Gershwin.

In Shapiro, for example, the court focused on the formal licensing agreement between defendant department store and the direct infringer-concessionaire. There, the concessionaire selling the bootleg recordings had a licensing agreement with the department store (H.L. Green Company) that required the concessionaire and its employees to “abide by, observe and obey all regulations promulgated from time to time by the H.L. Green Company,” and H.L. Green Company had the “unreviewable discretion” to discharge the concessionaires’ employees. In practice, H.L. Green Company was not actively involved in the sale of records and the concessionaire controlled and supervised the individual employees. Nevertheless, H.L. Green’s ability to police its concessionaire—which parallels Cherry Auction’s ability to police its vendors under Cherry Auction’s similarly broad contract with its vendors—was sufficient to satisfy the control requirement.

In Gershwin, the defendant lacked the formal, contractual ability to control the direct infringer. Nevertheless, because of defendant’s “pervasive participation in the formation and direction” of the direct infringers, including promoting them (i.e. creating an audience for them), the court found that defendants were in a position to police the direct infringers and held that the control element was satisfied. As the promoter and organizer of the swap meet, Cherry Auction wields the same level of control over the direct infringers as did the Gershwin defendant.

The district court’s dismissal of the vicarious liability claim in this case was therefore not justified on the ground that the complaint failed to allege sufficient control.

We next consider the issue of financial benefit. The plaintiff’s allegations encompass many substantive benefits to Cherry Auction from the infringing sales. These include the payment of a daily rental fee by each of the infringing vendors; a direct payment to Cherry Auction by each customer in the form of an admission fee, and incidental payments for parking, food and other services by customers seeking to purchase infringing recordings.

Cherry Auction nevertheless contends that these benefits cannot satisfy the financial benefit prong of vicarious liability because a commission, directly tied to the sale of particular infringing items, is required. They ask that we restrict the financial benefit prong to the precise facts presented in Shapiro, where defendant H.L. Green Company received a 10 or 12 per cent commission from the direct infringers’ gross receipts. Cherry Auction points to the low daily rental fee paid by each vendor, discounting all other financial benefits flowing to the swap meet, and asks that we hold that the swap meet is materially similar to a mere landlord. The facts alleged by Fonovisa, however, reflect that the defendants reap substantial financial benefits from admission fees, concession stand sales and parking fees, all of which flow directly from customers who want to buy the counterfeit recordings at bargain basement prices. The plaintiff has sufficiently alleged direct financial benefit.

Our conclusion is fortified by the continuing line of cases, starting with the dance hall cases, imposing vicarious liability on the operator of a business where infringing performances enhance the attractiveness of the venue to potential customers. See, e.g., Famous Music Corp. v. Bay State Harness Horse Racing and Breeding Ass’n, 554 F.2d 1213, 1214 (1st Cir.1977) (race track owner vicariously liable for band that entertained patrons who were not “absorbed in watching the races”); Shapiro, 316 F.2d at 307 (dance hall cases hold proprietor liable where infringing “activities provide the proprietor with a source of customers and enhanced income”). In this case, the sale of pirated recordings at the Cherry Auction swap meet is a “draw” for customers, as was the performance of pirated music in the dance hall cases and their progeny.

Plaintiffs have stated a claim for vicarious copyright infringement.

Contributory Copyright Infringement

Contributory infringement originates in tort law and stems from the notion that one who directly contributes to another’s infringement should be held accountable. Contributory infringement has been described as an outgrowth of enterprise liability, and imposes liability where one person knowingly contributes to the infringing conduct of another. The classic statement of the doctrine is in Gershwin, 443 F.2d 1159, 1162: “[O]ne who, with knowledge of the infringing activity, induces, causes or materially contributes to the infringing conduct of another, may be held liable as a ‘contributory’ infringer.”

There is no question that plaintiff adequately alleged the element of knowledge in this case. The disputed issue is whether plaintiff adequately alleged that Cherry Auction materially contributed to the infringing activity. We have little difficulty in holding that the allegations in this case are sufficient to show material contribution to the infringing activity. Indeed, it would be difficult for the infringing activity to take place in the massive quantities alleged without the support services provided by the swap meet. These services include, inter alia, the provision of space, utilities, parking, advertising, plumbing, and customers.

Here again Cherry Auction asks us to ignore all aspects of the enterprise described by the plaintiffs, to concentrate solely on the rental of space, and to hold that the swap meet provides nothing more. Yet Cherry Auction actively strives to provide the environment and the market for counterfeit recording sales to thrive. Its participation in the sales cannot be termed “passive,” as Cherry Auction would prefer.

The district court apparently took the view that contribution to infringement should be limited to circumstances in which the defendant “expressly promoted or encouraged the sale of counterfeit products, or in some manner protected the identity of the infringers.” Given the allegations that the local sheriff lawfully requested that Cherry Auction gather and share basic, identifying information about its vendors, and that Cherry Auction failed to comply, the defendant appears to qualify within the last portion of the district court’s own standard that posits liability for protecting infringers’ identities. Moreover, we agree with the Third Circuit’s analysis in Columbia Pictures Industries, Inc. v. Aveco, Inc., 800 F.2d 59 (3rd Cir.1986) that providing the site and facilities for known infringing activity is sufficient to establish contributory liability.

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Check Your Understanding – Fonovisa

Question 1. What elements must a plaintiff prove in order to establish a case of contributory liability?

Question 2. Which of the following activities have been found to constitute a “direct financial interest” in the infringing activities of a third party for purposes of establishing vicarious copyright liability?

Some things to consider when reading Abdallah:

1. Why did the defendant’s sale of “time-loaded” tapes result in liability for copyright infringement, while the sale of standard 30- or 60-minute tapes would not have resulted in any liability?
2. Could the defendant have been found liable for vicarious infringement?

A & M Recs., Inc. v. Abdallah

948 F. Supp. 1449 (C.D. Cal. 1996)

LAUGHLIN E. WATERS, Senior District Judge.

Plaintiffs are twenty-six major record companies in the United States, doing business in Los Angeles, California. Together they own the copyrights and trademarks for the 156 sound recordings and 24 trade names that are listed in Appendices A and B attached hereto.

Defendant Mohammed Abdallah is the president and sole owner of GAVC. GAVC sells empty cassette cartridges, spools of blank recording tape, audio duplicating equipment, and “time-loaded” audio tapes. A “time-loaded” audio tape is a tape that runs for a certain time period that is specified by the customer. For example, a customer would order 10,000 tapes with a playing time of 27 minutes and 45 seconds, and GAVC would then assemble 10,000 cassette tapes of that length out of blank recording tape and empty cassette cartridges using tape loading machines.

Between 1990 and 1992, GAVC sold time-loaded audio tapes to defendants Rizik Muslet, Mohammed Issa Halisi, and Mohammed Alabed. These individuals used the time-loaded audio tapes to illegally counterfeit the plaintiffs’ copyrighted works.

Audiocassette counterfeiters such as Mr. Muslet, Mr. Halisi, and Mr. Alabed must have blank cassettes timed to specific lengths in order to produce marketable counterfeit tapes. Tapes of standard lengths (e.g. 30 or 60 minutes) are unacceptable because they either cut off the music of the sound recording or leave large amounts of silent time on each side of the tape. Therefore, counterfeiters are dependent on suppliers such as GAVC to acquire blank tapes that are timed to the specific length of the sound recording that they wish to counterfeit.

Throughout their business relationship, Mr. Muslet sent Mr. Abdallah numerous “legitimate” tapes (i.e., non-counterfeit tapes of sound recordings) to time. Mr. Abdallah would time these cassettes and send them back to Mr. Muslet with the time of the cassette written on it. Mr. Muslet would then use these times when ordering blank tapes from Mr. Abdallah.

Mr. Abdallah’s knowledge of his customer’s counterfeiting activities was also demonstrated by his conversations with his employee, Asmar Chabbo. Mr. Chabbo testified that Mr. Abdallah explained to him that some of GAVC’s customers used the blank time-loaded tapes to counterfeit legitimate sound recordings, and also explained the methods that his customers used to counterfeit tapes.

Mr. Chabbo further testified to Mr. Abdallah’s relationship with Mohammed Halisi, GAVC’s largest customer. At one point Mr. Abdallah mentioned that he was worried about the credit he had extended to Mr. Halisi, because Mr. Halisi had been raided by the police for counterfeiting activities and all his merchandise had been seized. On another occasion, Mr. Halisi complained to Mr. Abdallah that the time-loaded cassettes he had purchased from GAVC were too short for the “Michael Jackson cassette.” These and other episodes related by Mr. Chabbo made it clear that Mr. Abdallah was aware of Mr. Halisi’s illegal counterfeiting activities and yet still continued to supply him with time-loaded audio cassettes.

In conclusion, this Court finds that at least three of Mr. Abdallah’s customers engaged in a substantial amount of counterfeiting and trademark infringement. This Court further finds that the time-loaded cassettes which Mr. Abdallah sold to these customers was a material contribution to their counterfeiting activities, since audiotape counterfeiters must have blank tapes timed to specific lengths. Finally, and most critically, this Court concludes that Mr. Abdallah had actual knowledge of the counterfeiting and trademark infringement being done by his customers, and that, notwithstanding that knowledge, he continued to supply these customers with the time-loaded audiocassettes necessary to continue their counterfeiting activities.

There was no evidence that Mr. Abdallah or anyone at GAVC ever copied any sound recordings themselves.

III. Conclusions of law

A. Copyright infringement

Since it is undisputed that Mr. Abdallah did not participate in any copyright or trademark violations directly, the plaintiff’s only basis for liability rests on a theory of contributory liability. This theory was outlined in Gershwin Publishing Corp. v. Columbia Artists Management, 443 F.2d 1159, 1162 (2nd Cir.1971), which stated that “one who, with knowledge of the infringing activity, induces, causes or materially contributes to the infringing conduct of another” is “equally liable with the direct infringer.” Under Gershwin, a plaintiff must prove two elements in order to establish a case of contributory liability: 1) the underlying copyright violation; and 2) the defendant knowingly induced, caused or materially contributed to that violation.

The Ninth Circuit’s most recent analysis of contributory copyright infringement is found in Fonovisa v. Cherry Auction, 76 F.3d 259 (9th Cir.1996). Fonovisa held that merely providing the site and facilities for known infringing activity is sufficient to establish contributory liability.

In the present case, the plaintiffs have established every element set out by Gershwin. As in Fonovisa, the underlying counterfeit activity is undisputed. This Court has concluded that Mr. Abdallah had actual knowledge of his customer’s counterfeit activity and continued to provide them with time-loaded cassettes. And finally, the Court has found that Mr. Abdallah’s provision of time-loaded cassettes was a material contribution to his customers’ counterfeiting activities. Mr. Abdallah’s contribution to the underlying counterfeiting activity seems at least as significant as the contribution made by the swap meet in Fonovisa. Therefore, the plaintiffs have successfully demonstrated that Mr. Abdallah is liable for contributory copyright infringement.

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Check Your Understanding – Abdallah

Question 1. True or false: Abdallah could have been found liable for contributory infringement based on the sale of audiotapes of standard length (as opposed to time-loaded audiotapes) if it were to be established that he knew the purchaser of the tapes were using them for counterfeiting activities, and his sale of the tapes to the infringers contributed to the infringement.

Some things to consider when reading Sony:

1. This is an important Supreme Court decision that grapples with the question of whether a party that provides consumers with technology that facilitates copyright infringement could be held liable for indirect copyright infringement.
2. The technology at issue is the videotape recorder (VTR), which at the time was revolutionary, allowing consumers to record copyrighted audiovisual works transmitted over the airwaves, e.g., movies and television programs, and to watch them later. VTR technology is no longer cutting-edge, but the holding of Sony remains the controlling test for determining the liability of firms that provide more modern technology that facilitates copyright infringement, such as peer-to-peer filesharing.
3. The Court looks to the Patent Act in arriving at what has become known as the Sony test (or Sony rule).
4. Consider the competing policy concerns at play in the case, both stated and unstated.
5. The portion of the Sony decision that addresses fair use appears later in this casebook’s section on fair use.

Sony Corp. v. Universal City Studios, Inc.

464 U.S. 417 (1984)

Justice STEVENS delivered the opinion of the Court.

Petitioners manufacture and sell home video tape recorders. Respondents own the copyrights on some of the television programs that are broadcast on the public airwaves. Some members of the general public use video tape recorders sold by petitioners to record some of these broadcasts, as well as a large number of other broadcasts. The question presented is whether the sale of petitioners’ copying equipment to the general public violates any of the rights conferred upon respondents by the Copyright Act.

Respondents commenced this copyright infringement action against petitioners in the United States District Court for the Central District of California in 1976. Respondents alleged that some individuals had used Betamax video tape recorders (VTR’s) to record some of respondents’ copyrighted works which had been exhibited on commercially sponsored television and contended that these individuals had thereby infringed respondents’ copyrights. Respondents further maintained that petitioners were liable for the copyright infringement allegedly committed by Betamax consumers because of petitioners’ marketing of the Betamax VTR’s. Respondents sought no relief against any Betamax consumer. Instead, they sought money damages and an equitable accounting of profits from petitioners, as well as an injunction against the manufacture and marketing of Betamax VTR’s.

After a lengthy trial, the District Court denied respondents all the relief they sought and entered judgment for petitioners. The United States Court of Appeals for the Ninth Circuit reversed the District Court’s judgment on respondent’s copyright claim, holding petitioners liable for contributory infringement and ordering the District Court to fashion appropriate relief. We now reverse.

An explanation of our rejection of respondents’ unprecedented attempt to impose copyright liability upon the distributors of copying equipment requires a quite detailed recitation of the findings of the District Court. In summary, those findings reveal that the average member of the public uses a VTR principally to record a program he cannot view as it is being televised and then to watch it once at a later time. This practice, known as “time-shifting,” enlarges the television viewing audience. For that reason, a significant amount of television programming may be used in this manner without objection from the owners of the copyrights on the programs. For the same reason, even the two respondents in this case, who do assert objections to time-shifting in this litigation, were unable to prove that the practice has impaired the commercial value of their copyrights or has created any likelihood of future harm. Given these findings, there is no basis in the Copyright Act upon which respondents can hold petitioners liable for distributing VTR’s to the general public. The Court of Appeals’ holding that respondents are entitled to enjoin the distribution of VTR’s, to collect royalties on the sale of such equipment, or to obtain other relief, if affirmed, would enlarge the scope of respondents’ statutory monopolies to encompass control over an article of commerce that is not the subject of copyright protection. Such an expansion of the copyright privilege is beyond the limits of the grants authorized by Congress.

I

The two respondents in this action, Universal Studios, Inc. and Walt Disney Productions, produce and hold the copyrights on a substantial number of motion pictures and other audiovisual works. In the current marketplace, they can exploit their rights in these works in a number of ways: by authorizing theatrical exhibitions, by licensing limited showings on cable and network television, by selling syndication rights for repeated airings on local television stations, and by marketing programs on prerecorded videotapes or videodiscs.

Petitioner Sony manufactures millions of Betamax video tape recorders and markets these devices through numerous retail establishments, some of which are also petitioners in this action. Sony’s Betamax VTR is a mechanism consisting of three basic components: (1) a tuner, which receives electromagnetic signals transmitted over the television band of the public airwaves and separates them into audio and visual signals; (2) a recorder, which records such signals on a magnetic tape; and (3) an adapter, which converts the audio and visual signals on the tape into a composite signal that can be received by a television set.

Several capabilities of the machine are noteworthy. The separate tuner in the Betamax enables it to record a broadcast off one station while the television set is tuned to another channel, permitting the viewer, for example, to watch two simultaneous news broadcasts by watching one “live” and recording the other for later viewing. Tapes may be reused, and programs that have been recorded may be erased either before or after viewing. A timer in the Betamax can be used to activate and deactivate the equipment at predetermined times, enabling an intended viewer to record programs that are transmitted when he or she is not at home. Thus a person may watch a program at home in the evening even though it was broadcast while the viewer was at work during the afternoon. The Betamax is also equipped with a pause button and a fast-forward control. The pause button, when depressed, deactivates the recorder until it is released, thus enabling a viewer to omit a commercial advertisement from the recording, provided, of course, that the viewer is present when the program is recorded. The fast forward control enables the viewer of a previously recorded program to run the tape rapidly when a segment he or she does not desire to see is being played back on the television screen.

The respondents and Sony both conducted surveys of the way the Betamax machine was used by several hundred owners during a sample period in 1978. Although there were some differences in the surveys, they both showed that the primary use of the machine for most owners was “time-shifting,”—the practice of recording a program to view it once at a later time, and thereafter erasing it. Time-shifting enables viewers to see programs they otherwise would miss because they are not at home, are occupied with other tasks, or are viewing a program on another station at the time of a broadcast that they desire to watch. Both surveys also showed, however, that a substantial number of interviewees had accumulated libraries of tapes. Sony’s survey indicated that over 80% of the interviewees watched at least as much regular television as they had before owning a Betamax. Respondents offered no evidence of decreased television viewing by Betamax owners.

Sony introduced considerable evidence describing television programs that could be copied without objection from any copyright holder, with special emphasis on sports, religious, and educational programming. For example, their survey indicated that 7.3% of all Betamax use is to record sports events, and representatives of professional baseball, football, basketball, and hockey testified that they had no objection to the recording of their televised events for home use.

Respondents offered opinion evidence concerning the future impact of the unrestricted sale of VTR’s on the commercial value of their copyrights. The District Court found, however, that they had failed to prove any likelihood of future harm from the use of VTR’s for time-shifting.

. . .

III

The Copyright Act does not expressly render anyone liable for infringement committed by another. In contrast, the Patent Act expressly brands anyone who “actively induces infringement of a patent” as an infringer, 35 U.S.C. § 271(b), and further imposes liability on certain individuals labeled “contributory” infringers, id., § 271(c). The absence of such express language in the copyright statute does not preclude the imposition of liability for copyright infringements on certain parties who have not themselves engaged in the infringing activity. For vicarious liability is imposed in virtually all areas of the law, and the concept of contributory infringement is merely a species of the broader problem of identifying the circumstances in which it is just to hold one individual accountable for the actions of another.

Respondents argue that supplying the “means” to accomplish an infringing activity and encouraging that activity through advertisement are sufficient to establish liability for copyright infringement. This argument rests on a gross generalization that cannot withstand scrutiny. Petitioners in the instant case do not supply Betamax consumers with respondents’ works; respondents do. Petitioners supply a piece of equipment that is generally capable of copying the entire range of programs that may be televised: those that are uncopyrighted, those that are copyrighted but may be copied without objection from the copyright holder, and those that the copyright holder would prefer not to have copied.

If vicarious liability is to be imposed on petitioners in this case, it must rest on the fact that they have sold equipment with constructive knowledge of the fact that their customers may use that equipment to make unauthorized copies of copyrighted material. There is no precedent in the law of copyright for the imposition of vicarious liability on such a theory. The closest analogy is provided by the patent law cases to which it is appropriate to refer because of the historic kinship between patent law and copyright law.

In the Patent Code both the concept of infringement and the concept of contributory infringement are expressly defined by statute. The prohibition against contributory infringement is confined to the knowing sale of a component especially made for use in connection with a particular patent. Moreover, the Act expressly provides that the sale of a “staple article or commodity of commerce suitable for substantial noninfringing use” is not contributory infringement.

When a charge of contributory infringement is predicated entirely on the sale of an article of commerce that is used by the purchaser to infringe a patent, the public interest in access to that article of commerce is necessarily implicated. A finding of contributory infringement does not, of course, remove the article from the market altogether; it does, however, give the patentee effective control over the sale of that item. Indeed, a finding of contributory infringement is normally the functional equivalent of holding that the disputed article is within the monopoly granted to the patentee.

For that reason, in contributory infringement cases arising under the patent laws the Court has always recognized the critical importance of not allowing the patentee to extend his monopoly beyond the limits of his specific grant. These cases deny the patentee any right to control the distribution of unpatented articles unless they are unsuited for any commercial noninfringing use. Unless a commodity has no use except through practice of the patented method, the patentee has no right to claim that its distribution constitutes contributory infringement. To form the basis for contributory infringement the item must almost be uniquely suited as a component of the patented invention.

We recognize there are substantial differences between the patent and copyright laws. But in both areas the contributory infringement doctrine is grounded on the recognition that adequate protection of a monopoly may require the courts to look beyond actual duplication of a device or publication to the products or activities that make such duplication possible. The staple article of commerce doctrine must strike a balance between a copyright holder’s legitimate demand for effective—not merely symbolic—protection of the statutory monopoly, and the rights of others freely to engage in substantially unrelated areas of commerce. Accordingly, the sale of copying equipment, like the sale of other articles of commerce, does not constitute contributory infringement if the product is widely used for legitimate, unobjectionable purposes. Indeed, it need merely be capable of substantial noninfringing uses.

IV

The question is thus whether the Betamax is capable of commercially significant noninfringing uses. In order to resolve that question, we need not explore all the different potential uses of the machine and determine whether or not they would constitute infringement. Rather, we need only consider whether on the basis of the facts as found by the district court a significant number of them would be non-infringing. Moreover, in order to resolve this case we need not give precise content to the question of how much use is commercially significant. For one potential use of the Betamax plainly satisfies this standard, however it is understood: private, noncommercial time-shifting in the home. It does so both (A) because respondents have no right to prevent other copyright holders from authorizing it for their programs, and (B) because the District Court’s factual findings reveal that even the unauthorized home time-shifting of respondents’ programs is legitimate fair use.

The Betamax is, therefore, capable of substantial noninfringing uses. Sony’s sale of such equipment to the general public does not constitute contributory infringement of respondent’s copyrights.

[Editor’s note: The section of this decision in which the Court held that home time-shifting is fair use appears later in the fair use section of this casebook.]

V

One may search the Copyright Act in vain for any sign that the elected representatives of the millions of people who watch television every day have made it unlawful to copy a program for later viewing at home, or have enacted a flat prohibition against the sale of machines that make such copying possible.

It may well be that Congress will take a fresh look at this new technology, just as it so often has examined other innovations in the past. But it is not our job to apply laws that have not yet been written. Applying the copyright statute, as it now reads, to the facts as they have been developed in this case, the judgment of the Court of Appeals must be reversed.

It is so ordered.

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Check Your Understanding – Sony

Question 1. In Sony, what role does patent law play in the Court’s decision?

Question 2. True or false: Sony held that the sale of an article of commerce that is capable of substantial noninfringing uses does not constitute contributory infringement.

Some things to consider when reading Napster:

1. In Napster, the Ninth Circuit applies its earlier holding in Fonovisa to an analogous scenario occurring in “cyberspace” and involving digital copies of sound recordings, rather than CDs.
2. What facts does the court point to in concluding that the plaintiff record companies have proven the necessary elements for establishing Napster’s liability for both contributory and vicarious copyright infringement?
3. Why does the court reject Napster’s assertion that it is protected from contributory liability by the holding of Sony?
4. Why does the court conclude that Sony is not relevant to the question of vicarious liability?

A&M Recs., Inc. v. Napster, Inc.

239 F.3d 1004 (9th Cir. 2001)

BEEZER, Circuit Judge:

Plaintiffs are engaged in the commercial recording, distribution and sale of copyrighted musical compositions and sound recordings. The complaint alleges that Napster, Inc. (“Napster”) is a contributory and vicarious copyright infringer.

I

It appears that Napster has designed and operates a system which permits the transmission and retention of sound recordings employing digital technology. Napster facilitates the transmission of MP3 files between and among its users. Through a process commonly called “peer-to-peer” file sharing, Napster allows its users to: (1) make MP3 music files stored on individual computer hard drives available for copying by other Napster users; (2) search for MP3 music files stored on other users’ computers; and (3) transfer exact copies of the contents of other users’ MP3 files from one computer to another via the Internet. These functions are made possible by Napster’s MusicShare software, available free of charge from Napster’s Internet site, and Napster’s network servers and server-side software. Napster provides technical support for the indexing and searching of MP3 files, as well as for its other functions, including a “chat room,” where users can meet to discuss music, and a directory where participating artists can provide information about their music.

IV

We first address plaintiffs’ claim that Napster is liable for contributory copyright infringement. Traditionally, “one who, with knowledge of the infringing activity, induces, causes or materially contributes to the infringing conduct of another, may be held liable as a ‘contributory’ infringer.” Gershwin Publ’g Corp. v. Columbia Artists Mgmt., Inc., 443 F.2d 1159, 1162 (2d Cir.1971); see also Fonovisa, Inc. v. Cherry Auction, Inc., 76 F.3d 259, 264 (9th Cir.1996). Put differently, liability exists if the defendant engages in “personal conduct that encourages or assists the infringement.” Matthew Bender & Co. v. West Publ’g Co., 158 F.3d 693, 706 (2d Cir.1998).

Napster, by its conduct, knowingly encourages and assists the infringement of plaintiffs’ copyrights.

A. Knowledge

Contributory liability requires that the secondary infringer “know or have reason to know” of direct infringement. The district court found that Napster had both actual and constructive knowledge that its users exchanged copyrighted music. The district court also concluded that the law does not require knowledge of “specific acts of infringement” and rejected Napster’s contention that because the company cannot distinguish infringing from noninfringing files, it does not “know” of the direct infringement.

It is apparent from the record that Napster has knowledge, both actual and constructive, of direct infringement. Napster claims that it is nevertheless protected from contributory liability by the teaching of Sony Corp. v. Universal City Studios, Inc., 464 U.S. 417 (1984). We disagree. We observe that Napster’s actual, specific knowledge of direct infringement renders Sony ‘s holding of limited assistance to Napster. We are compelled to make a clear distinction between the architecture of the Napster system and Napster’s conduct in relation to the operational capacity of the system.

The Sony Court refused to hold the manufacturer and retailers of video tape recorders liable for contributory infringement despite evidence that such machines could be and were used to infringe plaintiffs’ copyrighted television shows. Sony stated that if liability “is to be imposed on petitioners in this case, it must rest on the fact that they have sold equipment with constructive knowledge of the fact that their customers may use that equipment to make unauthorized copies of copyrighted material.” The Sony Court declined to impute the requisite level of knowledge where the defendants made and sold equipment capable of both infringing and “substantial noninfringing uses.”

We are bound to follow Sony, and will not impute the requisite level of knowledge to Napster merely because peer-to-peer file sharing technology may be used to infringe plaintiffs’ copyrights. We depart from the reasoning of the district court that Napster failed to demonstrate that its system is capable of commercially significant noninfringing uses. The district court improperly confined the use analysis to current uses, ignoring the system’s capabilities. See generally Sony, 464 U.S. at 442–43 (framing inquiry as whether the video tape recorder is “capable of commercially significant noninfringing uses”). Consequently, the district court placed undue weight on the proportion of current infringing use as compared to current and future noninfringing use. Nonetheless, regardless of the number of Napster’s infringing versus noninfringing uses, the evidentiary record here supported the district court’s finding that plaintiffs would likely prevail in establishing that Napster knew or had reason to know of its users’ infringement of plaintiffs’ copyrights.

If a computer system operator learns of specific infringing material available on his system and fails to purge such material from the system, the operator knows of and contributes to direct infringement. Conversely, absent any specific information which identifies infringing activity, a computer system operator cannot be liable for contributory infringement merely because the structure of the system allows for the exchange of copyrighted material. To enjoin simply because a computer network allows for infringing use would, in our opinion, violate Sony and potentially restrict activity unrelated to infringing use.

We nevertheless conclude that sufficient knowledge exists to impose contributory liability when linked to demonstrated infringing use of the Napster system. The record supports the district court’s finding that Napster has actual knowledge that specific infringing material is available using its system, that it could block access to the system by suppliers of the infringing material, and that it failed to remove the material.

B. Material Contribution

Under the facts as found by the district court, Napster materially contributes to the infringing activity. Relying on Fonovisa, the district court concluded that “[w]ithout the support services defendant provides, Napster users could not find and download the music they want with the ease of which defendant boasts.” We agree that Napster provides “the site and facilities” for direct infringement.  The district court correctly applied the reasoning in Fonovisa, and properly found that Napster materially contributes to direct infringement.

V

We turn to the question whether Napster engages in vicarious copyright infringement. Before moving into this discussion, we note that Sony ‘s “staple article of commerce” analysis has no application to Napster’s potential liability for vicarious copyright infringement. See Sony, 464 U.S. at 434–435; see generally 3 Melville B. Nimmer & David Nimmer, Nimmer On Copyright §§ 12.04[A][2] & [A][2][b] (2000) (confining Sony to contributory infringement analysis: “Contributory infringement itself is of two types—personal conduct that forms part of or furthers the infringement and contribution of machinery or goods that provide the means to infringe”). The issues of Sony’s liability under the doctrines of direct infringement and vicarious liability were not before the Supreme Court.

A. Financial Benefit

Financial benefit exists where the availability of infringing material “acts as a ‘draw’ for customers.” Fonovisa. Ample evidence supports the district court’s finding that Napster’s future revenue is directly dependent upon increases in userbase. More users register with the Napster system as the quality and quantity of available music increases. We conclude that the district court did not err in determining that Napster financially benefits from the availability of protected works on its system.

B. Supervision

The district court determined that Napster has the right and ability to supervise its users’ conduct. We agree in part.

The ability to block infringers’ access to a particular environment for any reason whatsoever is evidence of the right and ability to supervise. Here, plaintiffs have demonstrated that Napster retains the right to control access to its system. Napster has an express reservation of rights policy, stating on its website that it expressly reserves the “right to refuse service and terminate accounts in [its] discretion, including, but not limited to, if Napster believes that user conduct violates applicable law … or for any reason in Napster’s sole discretion, with or without cause.”

To escape imposition of vicarious liability, the reserved right to police must be exercised to its fullest extent. Turning a blind eye to detectable acts of infringement for the sake of profit gives rise to liability.

The district court correctly determined that Napster had the right and ability to police its system and failed to exercise that right to prevent the exchange of copyrighted material. The district court, however, failed to recognize that the boundaries of the premises that Napster “controls and patrols” are limited. See, e.g., Fonovisa, 76 F.3d at 262–63 (in addition to having the right to exclude vendors, defendant “controlled and patrolled” the premises); see also Polygram, 855 F.Supp. at 1328–29 (in addition to having the contractual right to remove exhibitors, trade show operator reserved the right to police during the show and had its “employees walk the  aisles to ensure ‘rules compliance’ ”). Put differently, Napster’s reserved “right and ability” to police is cabined by the system’s current architecture. As shown by the record, the Napster system does not “read” the content of indexed files, other than to check that they are in the proper MP3 format.

Napster, however, has the ability to locate infringing material listed on its search indices, and the right to terminate users’ access to the system. The file name indices, therefore, are within the “premises” that Napster has the ability to police. We recognize that the files are user-named and may not match copyrighted material exactly (for example, the artist or song could be spelled wrong). For Napster to function effectively, however, file names must reasonably or roughly correspond to the material contained in the files, otherwise no user could ever locate any desired music. As a practical matter, Napster, its users and the record company plaintiffs have equal access to infringing material by employing Napster’s “search function.”

Our review of the record requires us to accept the district court’s conclusion that plaintiffs have demonstrated a likelihood of success on the merits of the vicarious copyright infringement claim. Napster’s failure to police the system’s “premises,” combined with a showing that Napster financially benefits from the continuing availability of infringing files on its system, leads to the imposition of vicarious liability.

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Check Your Understanding – Napster

Question 1. Why did the court in A&M Recs. v. Napster reject Napster’s assertion that it was protected from contributory liability by the holding of Sony?

Question 2. Why did the court in A&M Recs. v. Napster conclude that Sony was not relevant to the question of vicarious liability?

Some things to consider when reading Aimster:

1. Aimster was a filesharing service similar to Napster. Aimster employed an encryption technology that prevented the company from knowing the names of files that its users were sharing, and based on this use of encryption, Aimster argued that it had no way of monitoring the content of swapped files. In contrast, Napster could monitor the names of files being exchanged. On what basis did Aimster argue that this use of encryption shielded the company from liability, and why did the court reject this argument?
2. Note that the author of the opinion, Judge Richard Posner, was also a law professor and is associated with the “law and economics” movement in legal theory. Near the end of the (edited) decision, Judge Posner applies a form of “cost-benefit analysis.”
3. Judge Posner often resorts to analogy, both in terms of the law (referencing analogous features of tort law and criminal law, for example) and the facts (often relying on analogies to non-digital scenarios when addressing issues of first impression involving digital technologies and the Internet).
4. How does the court distinguish the Aimster filesharing service from the videorecorder at issue in Sony?
5. The discussion of the role of willful blindness in copyright law.
6. The court’s distinction between an “innocuous” filesharing service and one that results in liability for contributory infringement.
7. The discussion of the public harm caused by illicit “file swapping.”
8. According to the Aimster court, under what circumstances does the provider of an Internet file-sharing service for which there are substantial noninfringing uses face liability for contributory infringement?

In re Aimster Copyright Litig.

334 F.3d 643 (7th Cir. 2003)

POSNER, Circuit Judge.

Owners of copyrighted popular music filed a number of closely related suits, which were consolidated and transferred to the Northern District of Illinois by the Multidistrict Litigation Panel, against John Deep and corporations that are controlled by him and need not be discussed separately. The numerous plaintiffs, who among them appear to own most subsisting copyrights on American popular music, claim that Deep’s “Aimster” Internet service (recently renamed “Madster”) is a contributory and vicarious infringer of these copyrights. The district judge entered a broad preliminary injunction, which had the effect of shutting down the Aimster service until the merits of the suit are finally resolved, from which Deep appeals. Aimster is one of a number of enterprises (the former Napster is the best known) that have been sued for facilitating the swapping of digital copies of popular music, most of it copyrighted, over the Internet.

Teenagers and young adults who have access to the Internet like to swap computer files containing popular music. If the music is copyrighted, such swapping, which involves making and transmitting a digital copy of the music, infringes copyright. The swappers, who are ignorant or more commonly disdainful of copyright and in any event discount the likelihood of being sued or prosecuted for copyright infringement, are the direct infringers. But firms that facilitate their infringement, even if they are not themselves infringers because they are not making copies of the music that is shared, may be liable to the copyright owners as contributory infringers. Recognizing the impracticability or futility of a copyright owner’s suing a multitude of individual infringers, the law allows a copyright holder to sue a contributor to the infringement instead, in effect as an aider and abettor. Another analogy is to the tort of intentional interference with contract, that is, inducing a breach of contract. If a breach of contract (and a copyright license is just a type of contract) can be prevented most effectively by actions taken by a third party, it makes sense to have a legal mechanism for placing liability for the consequences of the breach on him as well as on the party that broke the contract.

The district judge ruled that the recording industry had demonstrated a likelihood of prevailing on the merits should the case proceed to trial. He so ruled with respect to vicarious as well as contributory infringement; we begin with the latter, the more familiar charge.

The Aimster system has the following essential components: proprietary software that can be downloaded free of charge from Aimster’s Web site; Aimster’s server (a server is a computer that provides services to other computers, in this case personal computers owned or accessed by Aimster’s users, over a network), which hosts the Web site and collects and organizes information obtained from the users but does not make copies of the swapped files themselves and that also provides the matching service described below; computerized tutorials instructing users of the software on how to use it for swapping computer files; and “Club Aimster,” a related Internet service owned by Deep that users of Aimster’s software can join for a fee and use to download the “top 40” popular-music files more easily than by using the basic, free service. The “AIM” in “Aimster” stands for AOL instant-messaging service. Aimster is available only to users of such services (of which AOL’s is the most popular) because Aimster users can swap files only when both are online and connected in a chat room enabled by an instant-messaging service.

Someone who wants to use Aimster’s basic service for the first time to swap files downloads the software from Aimster’s Web site and then registers on the system by entering a user name (it doesn’t have to be his real name) and a password at the Web site. Having done so, he can designate any other registrant as a “buddy” and can communicate directly with all his buddies when he and they are online, attaching to his communications (which are really just e–mails) any files that he wants to share with the buddies. All communications back and forth are encrypted by the sender by means of encryption software furnished by Aimster as part of the software package downloadable at no charge from the Web site, and are decrypted by the recipient using the same Aimster–furnished software package. If the user does not designate a buddy or buddies, then all the users of the Aimster system become his buddies; that is, he can send or receive from any of them.

Users list on their computers the computer files they are willing to share. (They needn’t list them separately, but can merely designate a folder in their computer that contains the files they are willing to share.) A user who wants to make a copy of a file goes online and types the name of the file he wants in his “Search For” field. Aimster’s server searches the computers of those users of its software who are online and so are available to be searched for files they are willing to share, and if it finds the file that has been requested it instructs the computer in which it is housed to transmit the file to the recipient via the Internet for him to download into his computer. Once he has done this he can if he wants make the file available for sharing with other users of the Aimster system by listing it as explained above. In principle, therefore, the purchase of a single CD could be levered into the distribution within days or even hours of millions of identical, near-perfect (depending on the compression format used) copies of the music recorded on the CD—hence the recording industry’s anxiety about file-sharing services oriented toward consumers of popular music. But because copies of the songs reside on the computers of the users and not on Aimster’s own server, Aimster is not a direct infringer of the copyrights on those songs. Its function is similar to that of a stock exchange, which is a facility for matching offers rather than a repository of the things being exchanged (shares of stock). But unlike transactions on a stock exchange, the consummated “transaction” in music files does not take place in the facility, that is, in Aimster’s server.

What we have described so far is a type of Internet file-sharing system that might be created for innocuous purposes such as the expeditious exchange of confidential business data among employees of a business firm. The fact that copyrighted materials might sometimes be shared between users of such a system without the authorization of the copyright owner or a fair-use privilege would not make the firm a contributory infringer. Otherwise AOL’s instant-messaging system, which Aimster piggybacks on, might be deemed a contributory infringer. For there is no doubt that some of the attachments that AOL’s multitudinous subscribers transfer are copyrighted, and such distribution is an infringement unless authorized by the owner of the copyright. The Supreme Court made clear in the Sony decision that the producer of a product that has substantial noninfringing uses is not a contributory infringer merely because some of the uses actually made of the product (in that case a machine, the predecessor of today’s videocassette recorders, for recording television programs on tape) are infringing.

The video recorder was being used for a mixture of infringing and noninfringing uses and the Court thought that Sony could not demix them because once Sony sold the recorder it lost all control over its use. The court ruled that “the sale of copying equipment, like the sale of other articles of commerce, does not constitute contributory infringement if the product is widely used for legitimate, unobjectionable purposes. Indeed, it need merely be capable of substantial noninfringing uses.”

In our case the recording industry, emphasizing the reference to “articles of commerce” in the passage just quoted and elsewhere in the Court’s opinion, and also remarking Sony’s helplessness to prevent infringing uses of its recorders once it sold them, argues that Sony is inapplicable to services. With regard to services, the industry argues, the test is merely whether the provider knows it’s being used to infringe copyright. The industry points out that the provider of a service, unlike the seller of a product, has a continuing relation with its customers and therefore should be able to prevent, or at least limit, their infringing copyright by monitoring their use of the service and terminating them when it is discovered that they are infringing. We agree with the recording industry that the ability of a service provider to prevent its customers from infringing is a factor to be considered in determining whether the provider is a contributory infringer.

It is not necessarily a controlling factor, however, as the recording industry believes. If a service facilitates both infringing and noninfringing uses, as in the case of AOL’s instant-messaging service, and the detection and prevention of the infringing uses would be highly burdensome, the rule for which the recording industry is contending could result in the shutting down of the service or its annexation by the copyright owners (contrary to the clear import of the Sony decision), because the provider might find it impossible to estimate its potential damages liability to the copyright holders and would anyway face the risk of being enjoined. The fact that the recording industry’s argument if accepted might endanger AOL’s instant-messaging service is not only alarming; it is paradoxical, since subsidiaries of AOL’s parent company (AOL Time Warner), such as Warner Brothers Records and Atlantic Recording Corporation, are among the plaintiffs in this case and music chat rooms are among the facilities offered by AOL’s instant-messaging service.

We also reject the industry’s argument that Sony provides no defense to a charge of contributory infringement when, in the words of the industry’s brief, there is anything “more than a mere showing that a product may be used for infringing purposes.” Although the fact was downplayed in the majority opinion, it was apparent that the Betamax was being used for infringing as well as noninfringing purposes—even the majority acknowledged that 25 percent of Betamax users were fast forwarding through commercials—yet Sony was held not to be a contributory infringer. The Court was unwilling to allow copyright holders to prevent infringement effectuated by means of a new technology at the price of possibly denying noninfringing consumers the benefit of the technology. We therefore agree with Professor Goldstein that the Ninth Circuit erred in A & M Records, Inc. v. Napster, Inc. in suggesting that actual knowledge of specific infringing uses is a sufficient condition for deeming a facilitator a contributory infringer. 2 Paul Goldstein, Copyright § 6.1.2, p. 6:12–1 (2d ed.2003)

The recording industry’s hostility to the Sony decision is both understandable, given the amount of Internet-enabled infringement of music copyrights, and manifest—the industry in its brief offers five reasons for confining its holding to its specific facts. But it is being articulated in the wrong forum.

Equally, however, we reject Aimster’s argument that to prevail the recording industry must prove it has actually lost money as a result of the copying that its service facilitates. It is true that the Court in Sony emphasized that the plaintiffs had failed to show that they had sustained substantial harm from the Betamax. But the Court did so in the context of assessing the argument that time shifting of television programs was fair use rather than infringement. One reason time shifting was fair use, the Court believed, was that it wasn’t hurting the copyright owners because it was enlarging the audience for their programs. But a copyright owner who can prove infringement need not show that the infringement caused him a financial loss. Granted, without such a showing he cannot obtain compensatory damages; but he can obtain statutory damages, or an injunction, just as the owner of physical property can obtain an injunction against a trespasser without proving that the trespass has caused him a financial loss.

What is true is that when a supplier is offering a product or service that has noninfringing as well as infringing uses, some estimate of the respective magnitudes of these uses is necessary for a finding of contributory infringement. The Court’s action in striking the cost–benefit tradeoff in favor of Sony came to seem prescient when it later turned out that the principal use of video recorders was to allow people to watch at home movies that they bought or rented rather than to tape television programs. (In 1984, when Sony was decided, the industry was unsure how great the demand would be for prerecorded tapes compared to time shifting. The original Betamax played one-hour tapes, long enough for most television broadcasts but too short for a feature film. Sony’s competitors used the VHS format, which came to market later but with a longer playing time; this contributed to VHS’s eventual displacement of Betamax.) An enormous new market thus opened for the movie industry—which by the way gives point to the Court’s emphasis on potential as well as actual noninfringing uses. But the balancing of costs and benefits is necessary only in a case in which substantial noninfringing uses, present or prospective, are demonstrated.

We also reject Aimster’s argument that because the Court said in Sony that mere “constructive knowledge” of infringing uses is not enough for contributory infringement, and the encryption feature of Aimster’s service prevented Deep from knowing what songs were being copied by the users of his system, he lacked the knowledge of infringing uses that liability for contributory infringement requires. Willful blindness is knowledge, in copyright law (where indeed it may be enough that the defendant should have known of the direct infringement, Casella v. Morris, 820 F.2d 362, 365 (11th Cir.1987); 2 Goldstein, supra, § 6.1, p. 6:6), as it is in the law generally. One who, knowing or strongly suspecting that he is involved in shady dealings, takes steps to make sure that he does not acquire full or exact knowledge of the nature and extent of those dealings is held to have a criminal intent, because a deliberate effort to avoid guilty knowledge is all that the law requires to establish a guilty state of mind.  In United States v. Diaz, 864 F.2d 544, 550 (7th Cir.1988), the defendant, a drug trafficker, sought “to insulate himself from the actual drug transaction so that he could deny knowledge of it,” which he did sometimes by absenting himself from the scene of the actual delivery and sometimes by pretending to be fussing under the hood of his car. He did not escape liability by this maneuver; no more can Deep by using encryption software to prevent himself from learning what surely he strongly suspects to be the case: that the users of his service—maybe all the users of his service—are copyright infringers.

This is not to say that the provider of an encrypted instant-messaging service or encryption software is ipso factor a contributory infringer should his buyers use the service to infringe copyright, merely because encryption, like secrecy generally, facilitates unlawful transactions. Encryption fosters privacy, and privacy is a social benefit though also a source of social costs. Our point is only that a service provider that would otherwise be a contributory infringer does not obtain immunity by using encryption to shield itself from actual knowledge of the unlawful purposes for which the service is being used.

We also do not buy Aimster’s argument that since the Supreme Court distinguished, in the long passage from the Sony opinion that we quoted earlier, between actual and potential noninfringing uses, all Aimster has to show in order to escape liability for contributory infringement is that its file-sharing system could be used in noninfringing ways, which obviously it could be. Were that the law, the seller of a product or service used solely to facilitate copyright infringement, though it was capable in principle of noninfringing uses, would be immune from liability for contributory infringement. That would be an extreme result, and one not envisaged by the Sony majority. Otherwise its opinion would have had no occasion to emphasize the fact that Sony had not in its advertising encouraged the use of the Betamax to infringe copyright. Nor would the Court have thought it important to say that the Betamax was used “principally” for time shifting, which as we recall the Court deemed a fair use, or to remark that the plaintiffs owned only a small percentage of the total amount of copyrighted television programming and it was unclear how many of the other owners objected to home taping.

There are analogies in the law of aiding and abetting, the criminal counterpart to contributory infringement. A retailer of slinky dresses is not guilty of aiding and abetting prostitution even if he knows that some of his customers are prostitutes—he may even know which ones are. The extent to which his activities and those of similar sellers actually promote prostitution is likely to be slight relative to the social costs of imposing a risk of prosecution on him. But the owner of a massage parlor who employs women who are capable of giving massages, but in fact as he knows sell only sex and never massages to their customers, is an aider and abettor of prostitution. The slinky-dress case corresponds to Sony, and, like Sony, is not inconsistent with imposing liability on the seller of a product or service that, as in the massage-parlor case, is capable of noninfringing uses but in fact is used only to infringe. To the recording industry, a single known infringing use brands the facilitator as a contributory infringer. To the Aimsters of this world, a single noninfringing use provides complete immunity from liability. Neither is correct.

To situate Aimster’s service between these unacceptable poles, we need to say just a bit more about it. In explaining how to use the Aimster software, the tutorial gives as its only examples of file sharing the sharing of copyrighted music, including copyrighted music that the recording industry had notified Aimster was being infringed by Aimster’s users. The tutorial is the invitation to infringement that the Supreme Court found was missing in Sony. In addition, membership in Club Aimster enables the member for a fee of $4.95 a month to download with a single click the music most often shared by Aimster users, which turns out to be music copyrighted by the plaintiffs. Because Aimster’s software is made available free of charge and Aimster does not sell paid advertising on its Web site, Club Aimster’s monthly fee is the only means by which Aimster is financed and so the club cannot be separated from the provision of the free software. When a member of the club clicks on “play” next to the name of a song on the club’s Web site, Aimster’s server searches through the computers of the Aimster users who are online until it finds one who has listed the song as available for sharing, and it then effects the transmission of the file to the computer of the club member who selected it. Club Aimster lists only the 40 songs that are currently most popular among its members; invariably these are under copyright.

The evidence that we have summarized does not exclude the possibility of substantial noninfringing uses of the Aimster system, but the evidence is sufficient, especially in a preliminary-injunction proceeding, which is summary in character, to shift the burden of production to Aimster to demonstrate that its service has substantial noninfringing uses.

Aimster has failed to produce any evidence that its service has ever been used for a noninfringing use, let alone evidence concerning the frequency of such uses. Absent is any indication from real-life Aimster users that their primary use of the system is to transfer non-copyrighted files to their friends or identify users of similar interests and share information.

Even when there are noninfringing uses of an Internet file-sharing service, moreover, if the infringing uses are substantial then to avoid liability as a contributory infringer the provider of the service must show that it would have been disproportionately costly for him to eliminate or at least reduce substantially the infringing uses. Aimster failed to make that showing too, by failing to present evidence that the provision of an encryption capability effective against the service provider itself added important value to the service or saved significant cost. Aimster blinded itself in the hope that by doing so it might come within the rule of the Sony decision.

[Editor’s note: The court found that it did not need to decide the question of vicarious infringement given its affirmance of the district court’s determination that the recording industry would be likely to prevail on the issue of contributory infringement.]

AFFIRMED.

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Check your Understanding – Aimster

Question 1. Why did the court in In re Aimster reject Aimster’s argument that its use of encryption shielded the company from liability?

Question 2. How does the court distinguish the Aimster filesharing service from the videorecorder at issue in Sony?

Question 3. True or False: According to Aimster, the provider of an Internet file-sharing service for which there are both infringing and substantial noninfringing uses must show that it would have been disproportionately costly for the provider to eliminate (or at least reduce substantially) infringing use of the service in order to avoid liability as a contributory infringer.

Some things to consider when reading Grokster:

1. The parties accused of contributory infringement are Grokster and Streamcast, two companies that, like Aimster, attempted to provide a Napster-like service while avoiding liability for their user’s copyright infringement by designing the services in a manner that prevented the companies from having specific knowledge of file swapping involving copyrighted works.
2. When the Supreme Court granted certiorari in this case, it was thought that the Court would address the ongoing question of how much noninfringing use must a product be capable of to qualify for the Sony safe harbor, which requires that the product be “capable of substantial noninfringing uses.” In Grokster, the Court manages to avoid answering this question in the primary opinion, but some of the Justices express their divergent views on the contentious issue in two concurring opinions that are at odds with one another. This is the Supreme Court’s last word on the subject, so this important question has yet to be definitively answered.
3. Why did the lower courts find in favor of the accused companies?
4. What specific facts led the Court to conclude that the accused companies are liable for their users’ infringement?
5. What is the holding of the case?

Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd.

545 U.S. 913 (2005)

Justice SOUTER delivered the opinion of the Court.

The question is under what circumstances the distributor of a product capable of both lawful and unlawful use is liable for acts of copyright infringement by third parties using the product. We hold that one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties.

I

A

Respondents, Grokster, Ltd., and StreamCast Networks, Inc., defendants in the trial court, distribute free software products that allow computer users to share electronic files through peer-to-peer networks, so called because users’ computers communicate directly with each other, not through central servers. The advantage of peer-to-peer networks over information networks of other types shows up in their substantial and growing popularity. Because they need no central computer server to mediate the exchange of information or files among users, the high-bandwidth communications capacity for a server may be dispensed with, and the need for costly server storage space is eliminated. Since copies of a file (particularly a popular one) are available on many users’ computers, file requests and retrievals may be faster than on other types of networks, and since file exchanges do not travel through a server, communications can take place between any computers that remain connected to the network without risk that a glitch in the server will disable the network in its entirety. Given these benefits in security, cost, and efficiency, peer-to-peer networks are employed to store and distribute electronic files by universities, government agencies, corporations, and libraries, among others.

Other users of peer-to-peer networks include individual recipients of Grokster’s and StreamCast’s software, and although the networks that they enjoy through using the software can be used to share any type of digital file, they have prominently employed those networks in sharing copyrighted music and video files without authorization. A group of copyright holders (MGM for short, but including motion picture studios, recording companies, songwriters, and music publishers) sued Grokster and StreamCast for their users’ copyright infringements, alleging that they knowingly and intentionally distributed their software to enable users to reproduce and distribute the copyrighted works in violation of the Copyright Act. MGM sought damages and an injunction.

Grokster and StreamCast use no servers to intercept the content of the search requests or to mediate the file transfers conducted by users of the software, there being no central point through which the substance of the communications passes in either direction.

Although Grokster and StreamCast do not therefore know when particular files are copied, a few searches using their software would show what is available on the networks the software reaches. MGM commissioned a statistician to conduct a systematic search, and his study showed that nearly 90% of the files available for download on the FastTrack system were copyrighted works. Grokster and StreamCast dispute this figure, raising methodological problems and arguing that free copying even of copyrighted works may be authorized by the rightholders. They also argue that potential noninfringing uses of their software are significant in kind, even if infrequent in practice. Some musical performers, for example, have gained new audiences by distributing their copyrighted works for free across peer-to-peer networks, and some distributors of unprotected content have used peer-to-peer networks to disseminate files, Shakespeare being an example. Indeed, StreamCast has given Morpheus users the opportunity to download the briefs in this very case, though their popularity has not been quantified.

As for quantification, the parties’ anecdotal and statistical evidence entered thus far to show the content available on the FastTrack and Gnutella networks does not say much about which files are actually downloaded by users, and no one can say how often the software is used to obtain copies of unprotected material. But MGM’s evidence gives reason to think that the vast majority of users’ downloads are acts of infringement, and because well over 100 million copies of the software in question are known to have been downloaded, and billions of files are shared across the FastTrack and Gnutella networks each month, the probable scope of copyright infringement is staggering.

After the notorious file-sharing service, Napster, was sued by copyright holders for facilitation of copyright infringement, A&M Records, Inc. v. Napster, Inc., StreamCast gave away a software program of a kind known as OpenNap, designed as compatible with the Napster program and open to Napster users for downloading files from other Napster and OpenNap users’ computers. Evidence indicates that it was always StreamCast’s intent to use its OpenNap network to be able to capture email addresses of its initial target market so that it could promote its StreamCast Morpheus interface to them; indeed, the OpenNap program was engineered to leverage Napster’s 50 million user base.

Internal company documents indicate that StreamCast hoped to attract large numbers of former Napster users if that company was shut down by court order or otherwise, and that StreamCast planned to be the next Napster. A kit developed by StreamCast to be delivered to advertisers, for example, contained press articles about StreamCast’s potential to capture former Napster users, and it introduced itself to some potential advertisers as a company “which is similar to what Napster was.” An internal e-mail from a company executive stated: “ We have put this network in place so that when Napster pulls the plug on their free service … or if the Court orders them shut down prior to that … we will be positioned to capture the flood of their 32 million users that will be actively looking for an alternative.”

In addition to this evidence of express promotion, marketing, and intent to promote further, the business models employed by Grokster and StreamCast confirm that their principal object was use of their software to download copyrighted works. Grokster and StreamCast receive no revenue from users, who obtain the software itself for nothing. Instead, both companies generate income by selling advertising space, and they stream the advertising to Grokster and Morpheus users while they are employing the programs. As the number of users of each program increases, advertising opportunities become worth more. While there is doubtless some demand for free Shakespeare, the evidence shows that substantive volume is a function of free access to copyrighted work. Users seeking Top 40 songs, for example, or the latest release by Modest Mouse, are certain to be far more numerous than those seeking a free Decameron, and Grokster and StreamCast translated that demand into dollars.

Finally, there is no evidence that either company made an effort to filter copyrighted material from users’ downloads or otherwise impede the sharing of copyrighted files. Although Grokster appears to have sent e-mails warning users about infringing content when it received threatening notice from the copyright holders, it never blocked anyone from continuing to use its software to share copyrighted files. StreamCast not only rejected another company’s offer of help to monitor infringement, but blocked the Internet Protocol addresses of entities it believed were trying to engage in such monitoring on its networks.

B

The District Court held that those who used the Grokster and Morpheus software to download copyrighted media files directly infringed MGM’s copyrights, a conclusion not contested on appeal, but the court nonetheless granted summary judgment in favor of Grokster and StreamCast as to any liability arising from distribution of the then-current versions of their software. Distributing that software gave rise to no liability in the court’s view, because its use did not provide the distributors with actual knowledge of specific acts of infringement.

The Court of Appeals affirmed. The court read Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417 (1984), as holding that distribution of a commercial product capable of substantial noninfringing uses could not give rise to contributory liability for infringement unless the distributor had actual knowledge of specific instances of infringement and failed to act on that knowledge. The fact that the software was capable of substantial noninfringing uses in the Ninth Circuit’s view meant that Grokster and StreamCast were not liable, because they had no such actual knowledge, owing to the decentralized architecture of their software. The court also held that Grokster and StreamCast did not materially contribute to their users’ infringement because it was the users themselves who searched for, retrieved, and stored the infringing files, with no involvement by the defendants beyond providing the software in the first place.

We granted certiorari.

II

A

MGM and many of the amici fault the Court of Appeals’s holding for upsetting a sound balance between the respective values of supporting creative pursuits through copyright protection and promoting innovation in new communication technologies by limiting the incidence of liability for copyright infringement. The more artistic protection is favored, the more technological innovation may be discouraged; the administration of copyright law is an exercise in managing the tradeoff.

The tension between the two values is the subject of this case, with its claim that digital distribution of copyrighted material threatens copyright holders as never before, because every copy is identical to the original, copying is easy, and many people (especially the young) use file-sharing software to download copyrighted works. This very breadth of the software’s use may well draw the public directly into the debate over copyright policy, and the indications are that the ease of copying songs or movies using software like Grokster’s and Napster’s is fostering disdain for copyright protection. As the case has been presented to us, these fears are said to be offset by the different concern that imposing liability, not only on infringers but on distributors of software based on its potential for unlawful use, could limit further development of beneficial technologies.

The argument for imposing indirect liability in this case is, however, a powerful one, given the number of infringing downloads that occur every day using StreamCast’s and Grokster’s software. When a widely shared service or product is used to commit infringement, it may be impossible to enforce rights in the protected work effectively against all direct infringers, the only practical alternative being to go against the distributor of the copying device for secondary liability on a theory of contributory or vicarious infringement.

One infringes contributorily by intentionally inducing or encouraging direct infringement, see Gershwin Pub. Corp. v. Columbia Artists Management, Inc., 443 F.2d 1159, 1162 (C.A.2 1971), and infringes vicariously by profiting from direct infringement while declining to exercise a right to stop or limit it, Shapiro, Bernstein & Co. v. H.L. Green Co., 316 F.2d 304, 307 (C.A.2 1963). Although the Copyright Act does not expressly render anyone liable for infringement committed by another, these doctrines of secondary liability emerged from common law principles and are well established in the law.

B

Despite the currency of these principles of secondary liability, this Court has dealt with secondary copyright infringement in only one recent case, and because MGM has tailored its principal claim to our opinion there, a look at our earlier holding is in order. In Sony, this Court addressed a claim that secondary liability for infringement can arise from the very distribution of a commercial product. There, the product, novel at the time, was what we know today as the videocassette recorder or VCR. Copyright holders sued Sony as the manufacturer, claiming it was contributorily liable for infringement that occurred when VCR owners taped copyrighted programs because it supplied the means used to infringe, and it had constructive knowledge that infringement would occur. At the trial on the merits, the evidence showed that the principal use of the VCR was for “ ‘time-shifting,’ ” or taping a program for later viewing at a more convenient time, which the Court found to be a fair, not an infringing, use. There was no evidence that Sony had expressed an object of bringing about taping in violation of copyright or had taken active steps to increase its profits from unlawful taping. Although Sony’s advertisements urged consumers to buy the VCR to “record favorite shows” or “ “build a library” of recorded programs, neither of these uses was necessarily infringing.

On those facts, with no evidence of stated or indicated intent to promote infringing uses, the only conceivable basis for imposing liability was on a theory of contributory infringement arising from its sale of VCRs to consumers with knowledge that some would use them to infringe. But because the VCR was “capable of commercially significant noninfringing uses,” we held the manufacturer could not be faulted solely on the basis of its distribution.

The parties and many of the amici in this case think the key to resolving it is the Sony rule and, in particular, what it means for a product to be “capable of commercially significant noninfringing uses.” MGM advances the argument that granting summary judgment to Grokster and StreamCast as to their current activities gave too much weight to the value of innovative technology, and too little to the copyrights infringed by users of their software, given that 90% of works available on one of the networks was shown to be copyrighted. Assuming the remaining 10% to be its noninfringing use, MGM says this should not qualify as “substantial,” and the Court should quantify Sony to the extent of holding that a product used “principally” for infringement does not qualify. As mentioned before, Grokster and StreamCast reply by citing evidence that their software can be used to reproduce public domain works, and they point to copyright holders who actually encourage copying. Even if infringement is the principal practice with their software today, they argue, the noninfringing uses are significant and will grow.

We agree with MGM that the Court of Appeals misapplied Sony, which it read as limiting secondary liability quite beyond the circumstances to which the case applied. Sony barred secondary liability based on presuming or imputing intent to cause infringement solely from the design or distribution of a product capable of substantial lawful use, which the distributor knows is in fact used for infringement. The Ninth Circuit has read Sony’s limitation to mean that whenever a product is capable of substantial lawful use, the producer can never be held contributorily liable for third parties’ infringing use of it; it read the rule as being this broad, even when an actual purpose to cause infringing use is shown by evidence independent of design and distribution of the product, unless the distributors had “specific knowledge of infringement at a time at which they contributed to the infringement, and failed to act upon that information.” Because the Circuit found the StreamCast and Grokster software capable of substantial lawful use, it concluded on the basis of its reading of Sony that neither company could be held liable, since there was no showing that their software, being without any central server, afforded them knowledge of specific unlawful uses.

This view of Sony, however, was error, converting the case from one about liability resting on imputed intent to one about liability on any theory. Because Sony did not displace other theories of secondary liability, and because we find below that it was error to grant summary judgment to the companies on MGM’s inducement claim, we do not revisit Sony further, as MGM requests, to add a more quantified description of the point of balance between protection and commerce when liability rests solely on distribution with knowledge that unlawful use will occur. It is enough to note that the Ninth Circuit’s judgment rested on an erroneous understanding of Sony and to leave further consideration of the Sony rule for a day when that may be required.

C

Sony’s rule limits imputing culpable intent as a matter of law from the characteristics or uses of a distributed product. But nothing in Sony requires courts to ignore evidence of intent if there is such evidence, and the case was never meant to foreclose rules of fault-based liability derived from the common law. Thus, where evidence goes beyond a product’s characteristics or the knowledge that it may be put to infringing uses, and shows statements or actions directed to promoting infringement, Sony‘s staple-article rule will not preclude liability.

The classic case of direct evidence of unlawful purpose occurs when one induces commission of infringement by another, or “entic[es] or persuad[es] another” to infringe, Black’s Law Dictionary 790 (8th ed.2004), as by advertising.

The rule on inducement of infringement as developed in the early cases is no different today. Evidence of active steps taken to encourage direct infringement, such as advertising an infringing use or instructing how to engage in an infringing use, show an affirmative intent that the product be used to infringe, and a showing that infringement was encouraged overcomes the law’s reluctance to find liability when a defendant merely sells a commercial product suitable for some lawful use.

For the same reasons that Sony took the staple-article doctrine of patent law as a model for its copyright safe-harbor rule, the inducement rule, too, is a sensible one for copyright. We adopt it here, holding that one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties. We are, of course, mindful of the need to keep from trenching on regular commerce or discouraging the development of technologies with lawful and unlawful potential. Accordingly, just as Sony did not find intentional inducement despite the knowledge of the VCR manufacturer that its device could be used to infringe, mere knowledge of infringing potential or of actual infringing uses would not be enough here to subject a distributor to liability. Nor would ordinary acts incident to product distribution, such as offering customers technical support or product updates, support liability in themselves. The inducement rule, instead, premises liability on purposeful, culpable expression and conduct, and thus does nothing to compromise legitimate commerce or discourage innovation having a lawful promise.

III

A

The only apparent question about treating MGM’s evidence as sufficient to withstand summary judgment under the theory of inducement goes to the need on MGM’s part to adduce evidence that StreamCast and Grokster communicated an inducing message to their software users. The classic instance of inducement is by advertisement or solicitation that broadcasts a message designed to stimulate others to commit violations. MGM claims that such a message is shown here. It is undisputed that StreamCast beamed onto the computer screens of users of Napster-compatible programs ads urging the adoption of its OpenNap program, which was designed, as its name implied, to invite the custom of patrons of Napster, then under attack in the courts for facilitating massive infringement. Those who accepted StreamCast’s OpenNap program were offered software to perform the same services, which a factfinder could conclude would readily have been understood in the Napster market as the ability to download copyrighted music files. Grokster distributed an electronic newsletter containing links to articles promoting its software’s ability to access popular copyrighted music. And anyone whose Napster or free file-sharing searches turned up a link to Grokster would have understood Grokster to be offering the same file-sharing ability as Napster, and to the same people who probably used Napster for infringing downloads; that would also have been the understanding of anyone offered Grokster’s suggestively named Swaptor software, its version of OpenNap. And both companies communicated a clear message by responding affirmatively to requests for help in locating and playing copyrighted materials.

In StreamCast’s case, of course, the evidence just described was supplemented by other unequivocal indications of unlawful purpose in the internal communications and advertising designs aimed at Napster users (“When the lights went off at Napster … where did the users go?” Whether the messages were communicated is not to the point on this record. The function of the message in the theory of inducement is to prove by a defendant’s own statements that his unlawful purpose disqualifies him from claiming protection (and incidentally to point to actual violators likely to be found among those who hear or read the message). Proving that a message was sent out, then, is the preeminent but not exclusive way of showing that active steps were taken with the purpose of bringing about infringing acts, and of showing that infringing acts took place by using the device distributed. Here, the summary judgment record is replete with other evidence that Grokster and StreamCast, unlike the manufacturer and distributor in Sony, acted with a purpose to cause copyright violations by use of software suitable for illegal use.

Three features of this evidence of intent are particularly notable. First, each company showed itself to be aiming to satisfy a known source of demand for copyright infringement, the market comprising former Napster users. StreamCast’s internal documents made constant reference to Napster, it initially distributed its Morpheus software through an OpenNap program compatible with Napster, it advertised its OpenNap program to Napster users, and its Morpheus software functions as Napster did except that it could be used to distribute more kinds of files, including copyrighted movies and software programs. Grokster’s name is apparently derived from Napster, it too initially offered an OpenNap program, its software’s function is likewise comparable to Napster’s, and it attempted to divert queries for Napster onto its own Web site. Grokster and StreamCast’s efforts to supply services to former Napster users, deprived of a mechanism to copy and distribute what were overwhelmingly infringing files, indicate a principal, if not exclusive, intent on the part of each to bring about infringement.

Second, this evidence of unlawful objective is given added significance by MGM’s showing that neither company attempted to develop filtering tools or other mechanisms to diminish the infringing activity using their software. While the Ninth Circuit treated the defendants’ failure to develop such tools as irrelevant because they lacked an independent duty to monitor their users’ activity, we think this evidence underscores Grokster’s and StreamCast’s intentional facilitation of their users’ infringement.

Third, there is a further complement to the direct evidence of unlawful objective. It is useful to recall that StreamCast and Grokster make money by selling advertising space, by directing ads to the screens of computers employing their software. As the record shows, the more the software is used, the more ads are sent out and the greater the advertising revenue becomes. Since the extent of the software’s use determines the gain to the distributors, the commercial sense of their enterprise turns on high-volume use, which the record shows is infringing. This evidence alone would not justify an inference of unlawful intent, but viewed in the context of the entire record its import is clear.

The unlawful objective is unmistakable.

B

In addition to intent to bring about infringement and distribution of a device suitable for infringing use, the inducement theory of course requires evidence of actual infringement by recipients of the device, the software in this case. As the account of the facts indicates, there is evidence of infringement on a gigantic scale, and there is no serious issue of the adequacy of MGM’s showing on this point in order to survive the companies’ summary judgment requests.

The judgment of the Court of Appeals is vacated, and the case is remanded for further proceedings consistent with this opinion.

Justice GINSBURG, with whom THE CHIEF JUSTICE and Justice KENNEDY join, concurring

I concur in the Court’s decision, which vacates in full the judgment of the Court of Appeals for the Ninth Circuit, and write separately to clarify why I conclude that the Court of Appeals misperceived, and hence misapplied, our holding in Sony.

The Ninth Circuit went astray when that court granted summary judgment to Grokster and StreamCast on the charge of contributory liability based on distribution of their software products. Relying on its earlier opinion in A & M Records, Inc. v. Napster, Inc., the Court of Appeals held that “if substantial noninfringing use was shown, the copyright owner would be required to show that the defendant had reasonable knowledge of specific infringing files.” “A careful examination of the record,” the court concluded, “indicates that there is no genuine issue of material fact as to noninfringing use.” The appeals court pointed to the band Wilco, which made one of its albums available for free downloading, to other recording artists who may have authorized free distribution of their music through the Internet, and to public domain literary works and films available through Grokster’s and StreamCast’s software. Although it acknowledged petitioners’ assertion that “the vast majority of the software use is for copyright infringement,” the court concluded that Grokster’s and StreamCast’s proffered evidence met Sony’s requirement that “a product need only be capable of substantial noninfringing uses.”

This case differs markedly from Sony.

Even if the absolute number of noninfringing files copied using the Grokster and StreamCast software is large, it does not follow that the products are therefore put to substantial noninfringing uses and are thus immune from liability. The number of noninfringing copies may be reflective of, and dwarfed by, the huge total volume of files shared. Further, the District Court and the Court of Appeals did not sharply distinguish between uses of Grokster’s and StreamCast’s software products (which this case is about) and uses of peer-to-peer technology generally (which this case is not about).

In sum, when the record in this case was developed, there was evidence that Grokster’s and StreamCast’s products were, and had been for some time, overwhelmingly used to infringe, and that this infringement was the overwhelming source of revenue from the products. Fairly appraised, the evidence was insufficient to demonstrate, beyond genuine debate, a reasonable prospect that substantial or commercially significant noninfringing uses were likely to develop over time. On this record, the District Court should not have ruled dispositively on the contributory infringement charge by granting summary judgment to Grokster and StreamCast.

Justice BREYER, with whom Justice STEVENS and Justice O’CONNOR join, concurring.

I agree with the Court that the distributor of a dual-use technology may be liable for the infringing activities of third parties where he or she actively seeks to advance the infringement.  I further agree that, in light of our holding today, we need not now “revisit” Sony. Other Members of the Court, however, take up the Sony question: whether Grokster’s product is “capable of ‘substantial’ or ‘commercially significant’ noninfringing uses.” And they answer that question by stating that the Court of Appeals was wrong when it granted summary judgment on the issue in Grokster’s favor. I write to explain why I disagree with them on this matter.

I begin with Sony’s standard. In Sony, the Court considered the potential copyright liability of a company that did not itself illegally copy protected material, but rather sold a machine—a videocassette recorder (VCR)—that could be used to do so. The Court ultimately characterized the legal “question” in the particular case as “whether [Sony’s VCR] is capable of commercially significant noninfringing uses ” (while declining to give “precise content” to these terms).

When measured against Sony’s underlying evidence and analysis, the evidence now before us shows that Grokster passes Sony’s test—that is, whether the company’s product is capable of substantial or commercially significant noninfringing uses. For one thing, petitioners’ own expert declared that 75% of current files available on Grokster are infringing and 15% are “likely infringing.” That leaves some number of files near 10% that apparently are noninfringing, a figure very similar to the 9% or so of authorized time-shifting uses of the VCR that the Court faced in Sony. It is reasonable to infer quantities of current lawful use roughly approximate to those at issue in Sony.

Importantly, Sony also used the word “capable,” asking whether the product is “capable of ” substantial noninfringing uses. Its language and analysis suggest that a figure like 10%, if fixed for all time, might well prove insufficient, but that such a figure serves as an adequate foundation where there is a reasonable prospect of expanded legitimate uses over time. And its language also indicates the appropriateness of looking to potential future uses of the product to determine its “capability.”

Here the record reveals a significant future market for noninfringing uses of Grokster-type peer-to-peer software. Such software permits the exchange of any sort of digital file—whether that file does, or does not, contain copyrighted material. As more and more uncopyrighted information is stored in swappable form, it seems a likely inference that lawful peer- to-peer sharing will become increasingly prevalent.

There may be other now-unforeseen noninfringing uses that develop for peer-to-peer software, just as the home-video rental industry (unmentioned in Sony) developed for the VCR. But the foreseeable development of such uses, when taken together with an estimated 10% noninfringing material, is sufficient to meet Sony’s standard.

Of course, Grokster itself may not want to develop these other noninfringing uses. But Sony’s standard seeks to protect not the Groksters of this world (which in any event may well be liable under today’s holding), but the development of technology more generally. And Grokster’s desires in this respect are beside the point.

__________

Check Your Understanding – Grokster

Question 1. What was the difference between the filesharing service provided by Grokster and the Napster service that, according to Grokster, rendered its service noninfringing under Napster?

Question 2. Why did the lower courts find in favor of the accused companies in Grokster?

Question 3. True or False: Grokster holds that one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties.

Question 4. What specific facts led the Court to conclude that the accused companies were liable for contributory infringement?

Some things to consider when reading Perfect 10 v. Amazon:

1. 1. We looked at excerpts from this case earlier in the section of the casebook addressing the public display right. In that part of the decision, the court found that Google was probably not directly liable for “publicly displaying” the full-size images because those images did not reside on Google’s servers, i.e., the Ninth Circuit’s “server test.” In this part of the decision, the court considers whether Google could be held liable for indirect copyright infringement based on the infringement of the public display right by third parties.
   2. The decision discusses Netcom, an influential district court decision that appears later in this casebook in the section on DMCA safe harbors.
   3. According to Perfect 10 v. Amazon, under what circumstances can a computer system operator be held contributorily liable for providing access to infringing works?
   4. Why didn’t the “Sony rule” immunize Google from contributory liability?
   5. Might the outcome have been different if Google had image-recognition technology?

Perfect 10, Inc. v. Amazon.com, Inc.

508 F.3d 1146 (9th Cir. 2007)

IKUTA, Circuit Judge:

In this appeal, we consider a copyright owner’s efforts to stop an Internet search engine from facilitating access to infringing images. Perfect 10, Inc. sued Google Inc., for infringing Perfect 10’s copyrighted photographs of nude models, among other claims. The district court preliminarily enjoined Google from creating and publicly displaying thumbnail versions of Perfect 10’s images, but did not enjoin Google from linking to third-party websites that display infringing full-size versions of Perfect 10’s images.

I

Background

[Editor’s note: For the background of the case, see the excerpt from this decision appearing in the subsection of this casebook directed towards the public display right.]

III

Direct Infringement

[Editor’s note: The court held that Perfect 10 was likely to prevail in its claim that Google violated Perfect 10’s display right with respect to the infringing thumbnails, but not likely to prevail on its claim that Google violated either Perfect 10’s display or distribution right with respect to its full-size infringing images. This part of the decision appears in the subsection of this casebook directed towards the public display right.]

C. Fair Use Defense

[Editor’s note: The court held that Google’s use of thumbnails is a fair use and therefore does not constitute an infringement of Perfect 10’s copyright. This part of the decision appears later in this casebook in the section on fair use.]

IV

Secondary Liability for Copyright Infringement

We now turn to the district court’s ruling that Google is unlikely to be secondarily liable for its in-line linking to infringing full-size images under the doctrines of contributory and vicarious infringement. The district court ruled that Perfect 10 did not have a likelihood of proving success on the merits of either its contributory infringement or vicarious infringement claims with respect to the full-size images. In reviewing the district court’s conclusions, we are guided by the Supreme Court’s recent interpretation of secondary liability, namely: “one infringes contributorily by intentionally inducing or encouraging direct infringement, and infringes vicariously by profiting from direct infringement while declining to exercise a right to stop or limit it.” Grokster, 545 U.S. at 930.

Direct Infringement by Third Parties. As a threshold matter, before we examine Perfect 10’s claims that Google is secondarily liable, Perfect 10 must establish that there has been direct infringement by third parties.

[Editor’s note: The court found it to be undisputed that third-party websites directly infringed Perfect 10’s copyright by reproducing, displaying, and distributing unauthorized copies of Perfect 10’s images.]

A. Contributory Infringement

In order for Perfect 10 to show it will likely succeed in its contributory liability claim against Google, it must establish that Google’s activities meet the definition of contributory liability recently enunciated in Grokster. Within the general rule that “one infringes contributorily by intentionally inducing or encouraging direct infringement,” the Court has defined two categories of contributory liability: “Liability under our jurisprudence may be predicated on actively encouraging (or inducing) infringement through specific acts (as the Court’s opinion develops) or on distributing a product distributees use to infringe copyrights, if the product is not capable of ‘substantial’ or ‘commercially significant’ noninfringing uses.”

Looking at the second category of liability identified by the Supreme Court (distributing products), Google relies on Sony to argue that it cannot be held liable for contributory infringement because liability does not arise from the mere sale of a product (even with knowledge that consumers would use the product to infringe) if the product is capable of substantial non-infringing use. Google argues that its search engine service is such a product. Assuming the principle enunciated in Sony is applicable to the operation of Google’s search engine, then Google cannot be held liable for contributory infringement solely because the design of its search engine facilitates such infringement. Nor can Google be held liable solely because it did not develop technology that would enable its search engine to automatically avoid infringing images. However, Perfect 10 has not based its claim of infringement on the design of Google’s search engine and the Sony rule does not immunize Google from other sources of contributory liability.

We must next consider whether Google could be held liable under the first category of contributory liability identified by the Supreme Court, that is, the liability that may be imposed for intentionally encouraging infringement through specific acts.¹ Grokster tells us that contribution to infringement must be intentional for liability to arise. However, Grokster also directs us to analyze contributory liability in light of “rules of fault-based liability derived from the common law,” and common law principles establish that intent may be imputed. Tort law ordinarily imputes to an actor the intention to cause the natural and probable consequences of his conduct. RESTATEMENT (SECOND) OF TORTS § 8A cmt. b (1965) (“If the actor knows that the consequences are certain, or substantially certain, to result from his act, and still goes ahead, he is treated by the law as if he had in fact desired to produce the result.”). When the Supreme Court imported patent law’s “staple article of commerce doctrine” into the copyright context, it also adopted these principles of imputed intent. Grokster, 545 U.S. at 932 (“The [staple article of commerce] doctrine was devised to identify instances in which it may be presumed from distribution of an article in commerce that the distributor intended the article to be used to infringe another’s patent, and so may justly be held liable for that infringement.”). Therefore, under Grokster, an actor may be contributorily liable for intentionally encouraging direct infringement if the actor knowingly takes steps that are substantially certain to result in such direct infringement.

Our tests for contributory liability are consistent with the rule set forth in Grokster. We have adopted the general rule set forth in Gershwin Publishing Corp. v. Columbia Artists Management, Inc., namely: “one who, with knowledge of the infringing activity, induces, causes or materially contributes to the infringing conduct of another, may be held liable as a ‘contributory’ infringer.”

We have further refined this test in the context of cyberspace to determine when contributory liability can be imposed on a provider of Internet access or services. In Napster, we considered claims that the operator of an electronic file sharing system was contributorily liable for assisting individual users to swap copyrighted music files stored on their home computers with other users of the system. We stated that “if a computer system operator learns of specific infringing material available on his system and fails to purge such material from the system, the operator knows of and contributes to direct infringement.” Because Napster knew of the availability of infringing music files, assisted users in accessing such files, and failed to block access to such files, we concluded that Napster materially contributed to infringement.

The Napster test for contributory liability was modeled on the influential district court decision in Religious Technology Center v. Netcom On–Line Communication Services, Inc. (Netcom), 907 F.Supp. 1361, 1365–66 (N.D.Cal.1995). In Netcom, a disgruntled former Scientology minister posted allegedly infringing copies of Scientological works on an electronic bulletin board service. The messages were stored on the bulletin board operator’s computer, then automatically copied onto Netcom’s computer, and from there copied onto other computers comprising “a worldwide community” of electronic bulletin board systems. Netcom held that if plaintiffs could prove that Netcom knew or should have known that the minister infringed plaintiffs’ copyrights, “Netcom[would] be liable for contributory infringement since its failure to simply cancel [the former minister’s] infringing message and thereby stop an infringing copy from being distributed worldwide constitute[d] substantial participation in [the former minister’s] public distribution of the message.”

Although neither Napster nor Netcom expressly required a finding of intent, those cases are consistent with Grokster because both decisions ruled that a service provider’s knowing failure to prevent infringing actions could be the basis for imposing contributory liability. Under such circumstances, intent may be imputed. In addition, Napster and Netcom are consistent with the longstanding requirement that an actor’s contribution to infringement must be material to warrant the imposition of contributory liability.

Both Napster and Netcom acknowledge that services or products that facilitate access to websites throughout the world can significantly magnify the effects of otherwise immaterial infringing activities. The Supreme Court has acknowledged that “[t]he argument for imposing indirect liability” is particularly “powerful” when individuals using the defendant’s software could make a huge number of infringing downloads every day. Grokster, 545 U.S. at 929. Moreover, copyright holders cannot protect their rights in a meaningful way unless they can hold providers of such services or products accountable for their actions pursuant to a test such as that enunciated in Napster. Accordingly, we hold that a computer system operator can be held contributorily liable if it “has actual knowledge that specific infringing material is available using its system,” Napster, 239 F.3d at 1022, and can “take simple measures to prevent further damage” to copyrighted works, Netcom, 907 F.Supp. at 1375, yet continues to provide access to infringing works.

Here, the district court held that even assuming Google had actual knowledge of infringing material available on its system, Google did not materially contribute to infringing conduct because it did not undertake any substantial promotional or advertising efforts to encourage visits to infringing websites, nor provide a significant revenue stream to the infringing websites. This analysis is erroneous. 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. 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.

The district court did not resolve the factual disputes over the adequacy of Perfect 10’s notices to Google and Google’s responses to these notices. Moreover, there are factual disputes over whether there are reasonable and feasible means for Google to refrain from providing access to infringing images. Therefore, we must remand this claim to the district court for further consideration whether Perfect 10 would likely succeed in establishing that Google was contributorily liable for in-line linking to full-size infringing images under the test enunciated today.

B. Vicarious Infringement

Perfect 10 also challenges the district court’s conclusion that it is not likely to prevail on a theory of vicarious liability against Google. Grokster states that one “infringes vicariously by profiting from direct infringement while declining to exercise a right to stop or limit it.” As this formulation indicates, to succeed in imposing vicarious liability, a plaintiff must establish that the defendant exercises the requisite control over the direct infringer and that the defendant derives a direct financial benefit from the direct infringement. Grokster further explains the “control” element of the vicarious liability test as the defendant’s “right and ability to supervise the direct infringer.” Thus, under Grokster, a defendant exercises control over a direct infringer when he has both a legal right to stop or limit the directly infringing conduct, as well as the practical ability to do so.

With respect to the “control” element set forth in Grokster, Perfect 10 has not demonstrated a likelihood of showing that Google has the legal right to stop or limit the direct infringement of third-party websites. Unlike Fonovisa, where by virtue of a “broad contract” with its vendors the defendant swap meet operators had the right to stop the vendors from selling counterfeit recordings on its premises, Perfect 10 has not shown that Google has contracts with third-party websites that empower Google to stop or limit them from reproducing, displaying, and distributing infringing copies of Perfect 10’s images on the Internet.

Nor is Google similarly situated to Napster. Napster users infringed the plaintiffs’ reproduction and distribution rights through their use of Napster’s proprietary music-file sharing system. There, the infringing conduct was the use of Napster’s “service to download and upload copyrighted music.” Because Napster had a closed system requiring user registration, and could terminate its users’ accounts and block their access to the Napster system, Napster had the right and ability to prevent its users from engaging in the infringing activity of uploading file names and downloading Napster users’ music files through the Napster system. By contrast, Google cannot stop any of the third-party websites from reproducing, displaying, and distributing unauthorized copies of Perfect 10’s images because that infringing conduct takes place on the third-party websites. Google cannot terminate those third-party websites or block their ability to “host and serve infringing full-size images” on the Internet.

Moreover, the district court found that Google lacks the practical ability to police the third-party websites’ infringing conduct. Specifically, the court found that Google’s supervisory power is limited because “Google’s software lacks the ability to analyze every image on the [I]nternet, compare each image to all the other copyrighted images that exist in the world … and determine whether a certain image on the web infringes someone’s copyright.” The district court also concluded that Perfect 10’s suggestions regarding measures Google could implement to prevent its web crawler from indexing infringing websites and to block access to infringing images were not workable. Rather, the suggestions suffered from both “imprecision and overbreadth.” We hold that these findings are not clearly erroneous. Without image-recognition technology, Google lacks the practical ability to police the infringing activities of third-party websites. This distinguishes Google from the defendants held liable in Napster and Fonovisa.

Perfect 10 argues that Google could manage its own operations to avoid indexing websites with infringing content and linking to third-party infringing sites. This is a claim of contributory liability, not vicarious liability. Although the lines between direct infringement, contributory infringement, and vicarious liability are not clearly drawn, in general, contributory liability is based on the defendant’s failure to stop its own actions which facilitate third-party infringement, while vicarious liability is based on the defendant’s failure to cause a third party to stop its directly infringing activities. Google’s failure to change its operations to avoid assisting websites to distribute their infringing content may constitute contributory liability. However, this failure is not the same as declining to exercise a right and ability to make third-party websites stop their direct infringement. We reject Perfect 10’s efforts to blur this distinction.

Because we conclude that Perfect 10 has not shown a likelihood of establishing Google’s right and ability to stop or limit the directly infringing conduct of third-party websites, we agree with the district court’s conclusion that Perfect 10 has not established a likelihood of proving the control prong necessary for vicarious liability.

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Check Your Understanding – Perfect 10 v. Amazon

Question 1. According to Perfect 10 v. Amazon, under what circumstances can a computer system operator be held contributorily liable for providing access to infringing works?

Question 2. Why did the “Sony rule” not immunize Google from contributory liability?

Question 3. True or false: The outcome in Amazon might have been different if Google had image-recognition technology.

Some things to consider when reading Perfect 10 v. Visa:

1. The question in this case is whether a credit card company can be held contributorily liable for copyright infringement by third parties based on the credit card company’s processing of payments for the infringing content.
2. The copyright owner argues that if Google can potentially be held liable for providing a service that allows third parties to locate infringing content (see Perfect 10, Inc. v. Amazon.com, Inc.), then the credit card company can be held liable for providing a service that allows third parties to pay for infringing content. The majority in this split decision rejects that argument, while the dissent argues that, if anything, the credit card company should bear more liability. Which opinion do you find more persuasive?
3. The case is an example of the sometimes difficult task of delineating between mere “contribution” to infringing conduct, which does not constitute contributory infringement, and “material contribution” to infringing conduct, which can result in liability when coupled with knowledge.
4. Note the majority’s emphasis on the difference between making it easier to infringe vs. easier to profit from infringement, and the dissent’s rejection of this supposed distinction. Who do you find most convincing?
5. Note the analogy Perfect 10 seeks to establish between the facts of this case and Fonovisa and Napster. Why did the court distinguish the cases?

Perfect 10, Inc. v. Visa Int’l Serv. Ass’n

494 F.3d 788 (9th Cir. 2007)

MILAN D. SMITH, JR., Circuit Judge:

Perfect 10, Inc. (Perfect 10) sued Visa International Service Association, MasterCard International Inc., and several affiliated banks and data processing services (collectively, the Defendants), alleging secondary liability under federal copyright and trademark law and liability under California statutory and common law. It sued because Defendants continue to process credit card payments to websites that infringe Perfect 10’s intellectual property rights after being notified by Perfect 10 of infringement by those websites. The district court dismissed all causes of action under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted. We affirm the decision of the district court.

FACTS AND PRIOR PROCEEDINGS

Perfect 10 publishes the magazine “PERFECT10” and operates the subscription website www.perfect10.com., both of which “feature tasteful copyrighted images of the world’s most beautiful natural models.” Perfect 10 claims copyrights in the photographs published in its magazine and on its website, federal registration of the “PERFECT 10” trademark and blanket publicity rights for many of the models appearing in the photographs. Perfect 10 alleges that numerous websites based in several countries have stolen its proprietary images, altered them, and illegally offered them for sale online.

Instead of suing the direct infringers in this case, Perfect 10 sued Defendants, financial institutions that process certain credit card payments to the allegedly infringing websites. The Visa and MasterCard entities are associations of member banks that issue credit cards to consumers, automatically process payments to merchants authorized to accept their cards, and provide information to the interested parties necessary to settle the resulting debits and credits. Defendants collect fees for their services in these transactions. Perfect 10 alleges that it sent Defendants repeated notices specifically identifying infringing websites and informing Defendants that some of their consumers use their payment cards to purchase infringing images. Defendants admit receiving some of these notices, but they took no action in response to the notices after receiving them.

SECONDARY LIABILITY UNDER FEDERAL COPYRIGHT AND TRADEMARK LAW

A. Secondary Liability for Copyright Infringement

Perfect 10 alleges that numerous websites based in several countries—and their paying customers—have directly infringed its rights under the Copyright Act. In the present suit, however, Perfect 10 has sued Defendants, not the direct infringers, claiming contributory and vicarious copyright infringement because Defendants process credit card charges incurred by customers to acquire the infringing images.

We evaluate Perfect 10’s claims with an awareness that credit cards serve as the primary engine of electronic commerce and that Congress has determined it to be the “policy of the United States—(1) to promote the continued development of the Internet and other interactive computer services and other interactive media [and] (2) to preserve the vibrant and competitive free market that presently exists for the Internet and other interactive computer services, unfettered by Federal or State regulation.” 47 U.S.C. §§ 230(b)(1), (2).

1. Contributory Copyright Infringement

We have found that a defendant is a contributory infringer if it (1) has knowledge of a third party’s infringing activity, and (2) induces, causes, or materially contributes to the infringing conduct. In an Internet context, we have found contributory liability when the defendant “engages in personal conduct that encourages or assists the infringement.” A & M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1019 (9th Cir.2001). In Metro–Goldwyn–Mayer Studios, Inc. v. Grokster, Ltd., the Supreme Court adopted from patent law the concept of “inducement” and found that one infringes contributorily by intentionally inducing or encouraging direct infringement. Most recently, in a case also brought by Perfect 10, we found that “an actor may be contributorily liable [under Grokster ] for intentionally encouraging direct infringement if the actor knowingly takes steps that are substantially certain to result in such direct infringement.” Amazon.com, 487 F.3d at 727.

We understand these several criteria to be non-contradictory variations on the same basic test, i.e., that one contributorily infringes when he (1) has knowledge of another’s infringement and (2) either (a) materially contributes to or (b) induces that infringement. Viewed in isolation, the language of the tests described is quite broad, but when one reviews the details of the actual “cases and controversies” before the relevant court in each of the test-defining cases and the actual holdings in those cases, it is clear that the factual circumstances in this case are not analogous. To find that Defendants’ activities fall within the scope of such tests would require a radical and inappropriate expansion of existing principles of secondary liability and would violate the public policy of the United States.

a. Knowledge of the Infringing Activity

Because we find that Perfect 10 has not pled facts sufficient to establish that Defendants induce or materially contribute to the infringing activity, Perfect 10’s contributory copyright infringement claim fails and we need not address the Defendants’ knowledge of the infringing activity.

b. Material Contribution, Inducement, or Causation

To state a claim of contributory infringement, Perfect 10 must allege facts showing that Defendants induce, cause, or materially contribute to the infringing conduct. Three key cases found defendants contributorily liable under this standard: Fonovisa, 76 F.3d 259; Napster, 239 F.3d 1004; and Grokster, 545 U.S. 913. In Fonovisa, we held a swap meet operator contributorily liable for the sale of pirated works at the swap meet. In Napster, we held the operator of an electronic file sharing system liable when users of that system employed it to exchange massive quantities of copyrighted music. In Grokster, the Supreme Court found liability for the substantially similar act of distributing software that enabled exchange of copyrighted music on a peer-to-peer, rather than a centralized basis. Perfect 10 argues that by continuing to process credit card payments to the infringing websites despite having knowledge of ongoing infringement, Defendants induce, enable and contribute to the infringing activity in the same way the defendants did in Fonovisa, Napster and Grokster. We disagree.

1. Material Contribution

The credit card companies cannot be said to materially contribute to the infringement in this case because they have no direct connection to that infringement. Here, the infringement rests on the reproduction, alteration, display and distribution of Perfect 10’s images over the Internet. Perfect 10 has not alleged that any infringing material passes over Defendants’ payment networks or through their payment processing systems, or that Defendants’ systems are used to alter or display the infringing images. In Fonovisa, the infringing material was physically located in and traded at the defendant’s market. Here, it is not. Nor are Defendants’ systems used to locate the infringing images. The search engines in Amazon.com provided links to specific infringing images, and the services in Napster and Grokster allowed users to locate and obtain infringing material. Here, in contrast, the services provided by the credit card companies do not help locate and are not used to distribute the infringing images. While Perfect 10 has alleged that Defendants make it easier for websites to profit from this infringing activity, the issue here is reproduction, alteration, display and distribution, which can occur without payment. Even if infringing images were not paid for, there would still be infringement.

Our analysis is fully consistent with this court’s recent decision in Perfect 10 v. Amazon.com, where we found that “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.” The dissent claims this statement applies squarely to Defendants if we just substitute “payment systems” for “search engine.” But this is only true if search engines and payment systems are equivalents for these purposes, and they are not. The salient distinction is that Google’s search engine itself assists in the distribution of infringing content to Internet users, while Defendants’ payment systems do not. The Amazon.com court noted 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.” Defendants do not provide such a service. They in no way assist or enable Internet users to locate infringing material, and they do not distribute it. They do, as alleged, make infringement more profitable, and people are generally more inclined to engage in an activity when it is financially profitable. However, there is an additional step in the causal chain: Google may materially contribute to infringement by making it fast and easy for third parties to locate and distribute infringing material, whereas Defendants make it easier for infringement to be profitable, which tends to increase financial incentives to infringe, which in turn tends to increase infringement.

The dissent disagrees with our reading of Amazon.com and charges us with wishful thinking, and with “draw[ing] a series of ephemeral distinctions.” We respectfully disagree and assert that our construction of the relevant statutes and case law is completely consistent with existing federal law, is firmly grounded in both commercial and technical reality and conforms to the public policy of the United States. Helping users to locate an image might substantially assist users to download infringing images, but processing payments does not. If users couldn’t pay for images with credit cards, infringement could continue on a large scale because other viable funding mechanisms are available. For example, a website might decide to allow users to download some images for free and to make its profits from advertising, or it might develop other payment mechanisms that do not depend on the credit card companies. In either case, the unlicensed use of Perfect 10’s copyrighted images would still be infringement. We acknowledge that Defendants’ payment systems make it easier for such an infringement to be profitable, and that they therefore have the effect of increasing such infringement, but because infringement of Perfect 10’s copyrights can occur without using Defendants’ payment system, we hold that payment processing by the Defendants as alleged in Perfect 10’s First Amended Complaint does not constitute a “material contribution” under the test for contributory infringement of copyrights.

Our holding is also fully consistent with and supported by this court’s previous holdings in Fonovisa and Napster. In Fonovisa, we held a flea market proprietor liable as a contributory infringer when it provided the facilities for and benefitted from the sale of pirated works. The Fonovisa court found liability because the swap meet operator knowingly provided the “site and facilities” for the infringing activity.

In Napster, this court found the designer and distributor of a software program liable for contributory infringement. Napster was a file-sharing program which, while capable of non-infringing use, was expressly engineered to enable the easy exchange of pirated music and was widely so used. Citing the Fonovisa standard, the Napster court found that Napster materially contributes to the users’ direct infringement by knowingly providing the “site and facilities” for that infringement.

Seeking to draw an analogy to Fonovisa and, by extension, Napster, Perfect 10 pleads that Defendants materially contribute to the infringement by offering services that allow it to happen on a larger scale than would otherwise be possible. Specifically, because the swap meet in Fonovisa created a commercial environment which allowed the frequency of that infringement to increase, and the Napster program increased the frequency of infringement by making it easy, Perfect 10 argues that the Defendants have made available a payment system that allows third-party infringement to be profitable, and, consequently, more widespread than it otherwise might be. This analogy fails.

The swap meet operator in Fonovisa and the administrators of the Napster and Grokster programs increased the level of infringement by providing a centralized place, whether physical or virtual, where infringing works could be collected, sorted, found, and bought, sold, or exchanged.

Defendants merely provide a method of payment, not a “site” or “facility” of infringement. Any conception of “site and facilities” that encompasses Defendants would also include a number of peripherally-involved third parties, such as computer display companies, storage device companies, and software companies that make the software necessary to alter and view the pictures and even utility companies that provide electricity to the Internet.

2. Vicarious Copyright Infringement

Vicarious infringement is a concept related to, but distinct from, contributory infringement. To state a claim for vicarious copyright infringement, a plaintiff must allege that the defendant has (1) the right and ability to supervise the infringing conduct and (2) a direct financial interest in the infringing activity. The Supreme Court has recently offered (in dictum) an alternate formulation of the test: “One … infringes vicariously by profiting from direct infringement while declining to exercise a right to stop or limit it.” Grokster, 545 U.S. at 930. Perfect 10 alleges that Defendants have the right and ability to control the content of the infringing websites by refusing to process credit card payments to the websites, enforcing their own rules and regulations, or both. We hold that Defendants’ conduct alleged in Perfect 10’s first amended complaint fails to state a claim for vicarious copyright infringement.

a. Right and Ability to Supervise the Infringing Activity

In order to join a Defendant’s payment network, merchants and member banks must agree to follow that Defendant’s rules and regulations. These rules, among other things, prohibit member banks from providing services to merchants engaging in certain illegal activities and require the members and member banks to investigate merchants suspected of engaging in such illegal activity and to terminate their participation in the payment network if certain illegal activity is found. Perfect 10 has alleged that certain websites are infringing Perfect 10’s copyrights and that Perfect 10 sent notices of this alleged infringement to Defendants. Accordingly, Perfect 10 has adequately pled that (1) infringement of Perfect 10’s copyrights was occurring, (2) Defendants were aware of the infringement, and (3) on this basis, Defendants could have stopped processing credit card payments to the infringing websites. These allegations are not, however, sufficient to establish vicarious liability because even with all reasonable inferences drawn in Perfect 10’s favor, Perfect 10’s allegations of fact cannot support a finding that Defendants have the right and ability to control the infringing activity.

In reasoning closely analogous to the present case, the Amazon.com court held that Google was not vicariously liable for third-party infringement that its search engine facilitates. In so holding, the court found that Google’s ability to control its own index, search results, and webpages does not give Google the right to control the infringing acts of third parties even though that ability would allow Google to affect those infringing acts to some degree. Moreover, and even more importantly, the Amazon.com court rejected a vicarious liability claim based on Google’s policies with sponsored advertisers, which state that it reserves “the right to monitor and terminate partnerships with entities that violate others’ copyright[s].” The court found that

Google’s right to terminate an AdSense partnership does not give Google the right to stop direct infringement by third-party websites. An infringing third-party website can continue to reproduce, display, and distribute its infringing copies of Perfect 10 images after its participation in the AdSense program has ended.

This reasoning is equally applicable to the Defendants in this case. Just like Google, Defendants could likely take certain steps that may have the indirect effect of reducing infringing activity on the Internet at large. However, neither Google nor Defendants has any ability to directly control that activity, and the mere ability to withdraw a financial “carrot” does not create the “stick” of “right and ability to control” that vicarious infringement requires. A finding of vicarious liability here, under the theories advocated by the dissent, would also require a finding that Google is vicariously liable for infringement—a conflict we need not create, and radical step we do not take.

Perfect 10 also argues that were infringing websites barred from accepting the Defendants’ credit cards, it would be impossible for an online website selling adult images to compete and operate at a profit. While we must take this allegation as true, it still fails to state a claim because it conflates the power to stop profiteering with the right and ability to control infringement. Perfect 10’s allegations do not establish that Defendants have the authority to prevent theft or alteration of the copyrighted images, remove infringing material from these websites or prevent its distribution over the Internet. Rather, they merely state that this infringing activity could not be profitable without access to Defendants’ credit card payment systems. The alleged infringement does not turn on the payment; it turns on the reproduction, alteration and distribution of the images, which Defendants do not do, and which occurs over networks Defendants do not control.

b. Obvious and Direct Financial Interest in the Infringing Activity

Because Perfect 10 has failed to show that Defendants have the right and ability to control the alleged infringing conduct, it has not pled a viable claim of vicarious liability. Accordingly, we need not reach the issue of direct financial interest.

KOZINSKI, Circuit Judge, dissenting for the most part:

Federal law gives copyright owners the exclusive right to “distribute copies [of their works] … to the public by sale.” 17 U.S.C. § 106(3). Plaintiff alleges that certain third parties it refers to as the “Stolen Content Websites” unlawfully copy its protected images and sell them to the public, using defendants’ payment systems as financial intermediaries. According to plaintiff, the Stolen Content Websites “maintain no physical presence in the United States in order to evade criminal and civil liability for their illegal conduct.” Plaintiff also claims that “Defendants do not enforce their own rules against [the] Stolen Content Websites because Defendants do not want to lose the substantial revenues and profits they receive from the websites.” Plaintiff has repeatedly notified defendants that they are abetting the sale of stolen merchandise by “knowingly providing crucial transactional support services for the sale of millions of stolen photos and film clips worth billions of dollars,” but to no avail. Frustrated in its effort to protect the rights Congress has given it, plaintiff turns to the federal courts for redress. We should not slam the courthouse door in its face.

Accepting the truth of plaintiff’s allegations, as we must on a motion to dismiss, the credit cards are easily liable for indirect copyright infringement: They knowingly provide a financial bridge between buyers and sellers of pirated works, enabling them to consummate infringing transactions, while making a profit on every sale. If such active participation in infringing conduct does not amount to indirect infringement, it’s hard to imagine what would. By straining to absolve defendants of liability, the majority leaves our law in disarray.

Contributory Infringement

We have long held that a defendant is liable for contributory infringement if it “materially contributes to the infringing conduct.” Our recent opinion in Perfect 10, Inc. v. Amazon.com, Inc., 487 F.3d 701 (9th Cir.2007), canvasses the caselaw in this area and concludes that 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.” Substitute “payment systems” for “search engine” in this sentence, and it describes defendants here: If a consumer wishes to buy an infringing image from one of the Stolen Content Websites, he can do so by using Visa or MasterCard, just as he can use Google to find the infringing images in the first place.

This is not just an economic incentive for infringement; it’s an essential step in the infringement process. At the pleadings stage, we must accept plaintiff’s allegations that credit cards are indispensable to the operation of the Stolen Content Websites, and that these websites would be forced out of business without them.

The majority’s attempt to distinguish location services from payment services by trying to show that there are viable alternatives for the latter but not the former cuts entirely against them. As plaintiff alleges, and experience tells us, there are numerous ways of locating infringing images on the Internet, but there are no adequate substitutes for credit cards when it comes to paying for them. A few consumers might use checks or money orders to pay for infringing images, but this would be far more cumbersome, time-consuming and risky than using credit cards. If it mattered whether search engines or credit cards are more important to peddling infringing content on the Internet, the cards would win hands down.

Defendants here are alleged to provide an essential service to infringers, a service that enables infringement on a massive scale. Defendants know about the infringements; they profit from them; they are intimately and causally involved in a vast number of infringing transactions that could not be consummated if they refused to process the payments; they have ready means to stop the infringements. Were we to rule for plaintiff, as we should, I have every confidence that future courts would be able to distinguish this case when and if they are confronted with lawsuits against utility companies, software vendors and others who provide incidental services to infringers.

Vicarious Infringement

A party “infringes vicariously by profiting from direct infringement while declining to exercise a right to stop or limit it.” There is no doubt that defendants profit from the infringing activity of the Stolen Content Websites; after all, they take a cut of virtually every sale of pirated material.

Defendants here also have a right to stop or limit the infringing activity, a right they have refused to exercise. As the majority recognizes, “Perfect 10 … claims that Defendants’ rules and regulations permit them to require member merchants to cease illegal activity—presumably including copyright infringement—as a condition to their continuing right to receive credit card payments from the relevant Defendant entities.”

That the pirates might find some other way of doing business is of no consequence; our cases make this perfectly clear. It didn’t matter in Fonovisa that the infringers there could have continued their illegal sales by mail order or by hawking their unlawful merchandise on street corners. Nor did it matter in Napster or Grokster that the direct infringers might find some other means of illegally sharing their protected content with others. Indeed, there is no case involving secondary infringement, going back to the dance hall cases of the last century, where the secondary infringer’s refusal to do business with the direct infringer could have stopped infringement altogether and forever. Yet, courts have presumed that removing the particular means of infringement challenged in each case would make direct infringement more difficult and thereby diminish the scale of infringing activity.

Here, the Stolen Content Websites have chosen credit cards as a form of payment, and for good reason. Credit cards are ubiquitous and permit the transfer of funds electronically in a matter of seconds. Consumers need not wait days or weeks for a check to reach its destination and clear before gaining access to the salacious pictures they crave. Consumers also know that, if goods bought by credit card are not delivered, the cards will likely reverse the transaction. Credit cards thus act as informal escrow agents, effectively guaranteeing that their merchants will deliver the goods. Blocking the ability to accept credit cards would be a heavy blow to the Stolen Content Websites because cards are “overwhelmingly the primary way by which customers pay to view Stolen Content Websites.”

To resolve this case, however, we need not adopt a rule holding all credit cards responsible for all infringing Internet sales because plaintiff has alleged far more than the ordinary credit card/merchant relationship. According to plaintiff, defendants have adopted special rules and practices that apply only to the Stolen Content Websites, and that are designed to make it easier for these websites to ply their illegal trade. Plaintiff claims that the credit cards have singled out the Stolen Content Websites for preferential treatment because of the unusual and substantial profits they make on such transactions. Read fully and fairly, the complaint alleges that defendants are not merely passive providers of services available on equal terms to legal and illegal businesses alike; they are actually in cahoots with the pirates to prop up their illegal businesses and share their ill-gotten gains. If this is not vicarious infringement, nothing is.

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Check Your Understanding – Perfect 10 v. Visa

Question 1. Why does the majority in Visa reject the copyright owner’s argument that if Google can potentially be held liable for providing a service that allows third parties to locate infringing content (see Perfect 10, Inc. v. Amazon.com, Inc.), then the defendant credit card processing companies can be held liable for providing a service that allows third parties to pay for infringing content?

Question 2. On what basis did the Visa majority distinguish between the facts of that case and those of Fonavisa and Napster?”

Some things to consider when reading BMG Rts. Mgmt.:

1. Excerpts from this 2018 decision appear later in this casebook in the section on DMCA safe harbors. The excerpts from the decision reproduced below address challenges to the jury instructions relating to contributory infringement.
2. In particular, the court addresses the proper interpretation of Sony’s safe harbor for technologies “capable of substantial noninfringing use” in light of the Supreme Court’s subsequent decision in Grokster.
3. In this decision, the Fourth Circuit holds that the district court erred by instructing the jury that a party can be held liable for contributory infringement if it “knew or should have known of such infringing activity,” i.e., a negligence standard, and held that contributory liability can be based on willful blindness, but not on recklessness or negligence.

BMG Rts. Mgmt. (US) LLC v. Cox Commc’ns, Inc.

881 F.3d 293 (4th Cir. 2018)

DIANA GRIBBON MOTZ, Circuit Judge:

BMG Rights Management (US) LLC (“BMG”), which owns copyrights in musical compositions, filed this suit alleging copyright infringement against Cox Communications, Inc. and CoxCom, LLC (collectively, “Cox”), providers of high-speed Internet access. BMG seeks to hold Cox contributorily liable for infringement of BMG’s copyrights by subscribers to Cox’s Internet service. After a two-week trial, a jury found Cox liable for willful contributory infringement and awarded BMG $25 million in statutory damages. Cox appeals, asserting that the district court incorrectly instructed the jury. We reverse in part, vacate in part, and remand for a new trial because of certain errors in the jury instructions.

[Editor’s note: The background of this decision and a section addressing the DMCA safe harbor defense appear later in this casebook. The discussion of the challenged jury instructions appears below.]

III.

We turn to Cox’s other principal challenge to the judgment: that the district court erred in instructing the jury as to contributory infringement. Where an instruction is erroneous, we will set aside the verdict if there is a reasonable probability that the erroneous instruction affected the jury’s verdict.

A.

Cox’s initial jury instruction argument rests on its contention that it cannot be held liable for contributory copyright infringement because its technology is “capable of substantial noninfringing use.” According to Cox, the district court erred in refusing to instruct the jury on this principle.

This argument is meritless. Of course, the mere sale of a product that has both lawful and unlawful uses does not in and of itself establish an intent to infringe. That is the holding of Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417 (1984). In Sony, copyright holders sought to hold Sony contributorily liable for selling video cassette recorders (VCRs) that customers used to tape copyrighted programs. The Supreme Court rejected that claim, holding that because a VCR was “capable of commercially significant noninfringing uses,” its manufacturer, Sony, could not be held contributory liable for distribution of the VCR.

A few courts initially interpreted Sony‘s limitation, as Cox does, to mean that if a product can be substantially used lawfully, its producer cannot be contributorily liable for copyright infringement. See, e.g., Metro–Goldwyn–Mayer Studios, Inc. v. Grokster Ltd., 380 F.3d 1154, 1162 (9th Cir. 2004), vacated and remanded, 545 U.S. 913 (2005); Vault Corp. v. Quaid Software Ltd., 847 F.2d 255, 262, 267 (5th Cir. 1988). But in Grokster, the Supreme Court rejected this broad reading. See Metro–Goldwyn–Mayer Studios Inc. v. Grokster, Ltd., 545 U.S. 913 (2005). The Court clarified that Sony barred secondary liability based on presuming or imputing intent to cause infringement solely from the design or distribution of a product capable of substantial lawful use, which the distributor knows is in fact used for infringement. The Grokster Court explained that under Sony, intent to infringe will not be presumed from “the equivocal conduct of selling an item with substantial lawful as well as unlawful uses,” even when the seller has the “understanding that some of [his or her] products will be misused.” More is needed. But the fact that a product is “capable of substantial lawful use” does not mean the “producer can never be held contributorily liable.”

Exactly the same flaw infects Cox’s related argument that the district court erred in refusing to instruct the jury that “[i]t is not a material contribution to provide a product or service that is capable of substantial non-infringing uses.” As the Supreme Court explained, reversal was required in Grokster because the Ninth Circuit had “read Sony‘s limitation to mean that whenever a product is capable of substantial lawful use, the producer can never be held contributorily liable for third parties’ infringing use of it …. [t]his view of Sony, however, was error.”

Because the instruction Cox requested misstates the law, the district court did not err in refusing to give it. In fact, providing a product with “substantial non-infringing uses” can constitute a material contribution to copyright infringement. See, e.g., Perfect 10, Inc. v. Amazon.com, Inc., 508 F.3d 1146, 1172 (9th Cir. 2007) (holding that Google’s image search engine “substantially assists websites to distribute their infringing copies” of copyrighted images, and thus constitutes a material contribution, even though “Google’s assistance is available to all websites, not just infringing ones”). Grokster makes clear that what matters is not simply whether the product has some or even many non-infringing uses, but whether the product is distributed with the intent to cause copyright infringement.

Thus, contrary to Cox’s argument, the fact that its technology can be substantially employed for a noninfringing use does not immunize it from liability for contributory copyright infringement. The district court did not err in refusing to instruct the jury to the contrary.

B.

Alternatively, Cox offers a more nuanced attack on the contributory infringement instructions. Cox contends that the court erred in charging the jury as to the intent necessary to prove contributory infringement. Specifically, Cox challenges the district court’s instructions that the jury could impose liability for contributory infringement if the jury found “Cox knew or should have known of such infringing activity.” We agree that in so instructing the jury, the court erred.

i.

Grokster teaches that “[o]ne infringes contributorily by intentionally inducing or encouraging direct infringement.” The requisite intent may, however, be presumed according to the “rules of fault-based liability derived from the common law.” The most relevant of these common law rules is that if a person “knows that the consequences are certain, or substantially certain, to result from his act, and still goes ahead, he is treated by the law as if he had in fact desired to produce the result.” See Restatement (Second) of Torts § 8A cmt. b (1965); Grokster, 545 U.S. at 932 (a person “will be presumed to intend the natural consequences of his acts” (internal quotation marks and citation omitted) ). Under this principle, “when an article is good for nothing else but infringement … there is no injustice in presuming or imputing an intent to infringe” based on its sale. Grokster, 545 U.S. at 932. Assuming the seller is aware of the nature of his product—that its only use is infringing—he knows that infringement is substantially certain to result from his sale of that product and he may therefore be presumed to intend that result.

A similar result follows when a person sells a product that has lawful uses, but with the knowledge that the buyer will in fact use the product to infringe copyrights. In that circumstance, the seller knows that infringement is substantially certain to result from the sale; consequently, the seller intends to cause infringement just as much as a seller who provides a product that has exclusively unlawful uses.

These principles apply equally in cases, like this one, that involve subscription services or rentals rather than one-time sales. Consider a company that leases VCRs, learns that specific customers use their VCRs to infringe, but nonetheless renews the lease to those infringing customers. Given those facts, the company knows that its action—renewing the lease of the VCR to these specific customers—is substantially certain to result in infringement, and so an intent to cause infringement may be presumed.

It is well-established that one mental state slightly less demanding than actual knowledge—willful blindness—can establish the requisite intent for contributory copyright infringement. This is so because the law recognizes willful blindness as equivalent to actual knowledge. See Global–Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754, 766 (2011) (“[P]ersons who know enough to blind themselves to direct proof of critical facts in effect have actual knowledge of those facts.”); Aimster, 334 F.3d at 650 (“Willful blindness is knowledge, in copyright law … as it is in the law generally.”).

Whether other mental states—such as negligence (where a defendant “should have known” of infringement)—can suffice to prove contributory copyright infringement presents a more difficult question. The notion that contributory liability could be imposed based on something less than actual knowledge, or its equivalent, willful blindness, is not entirely without support. See Aimster, 334 F.3d at 650 (“[I]n copyright law … indeed it may be enough that the defendant should have known of the direct infringement ….”) Nonetheless, we believe for several reasons, that, as Cox contends, negligence does not suffice to prove contributory infringement; rather, at least willful blindness is required.

First, Grokster’s recitation of the standard—that “[o]ne infringes contributorily by intentionally inducing or encouraging direct infringement”—is on its face difficult to reconcile with a negligence standard. In addition, it would have been unnecessary for the Court to discuss in detail the situations in which intent may be presumed, and those situations, like Sony, in which it may not, if liability did not require intent at all, but merely required negligence.

Looking to patent law, as the Supreme Court did in Sony and Grokster, further counsels against a negligence standard. The Supreme Court has long held that contributory patent infringement requires knowledge of direct infringement. Aro Mfg. Co. v. Convertible Top Replacement Co., 377 U.S. 476, 488 (1964). And in 2011, the Court held that willful blindness satisfies this knowledge requirement, but recklessness (“one who merely knows of a substantial and unjustified risk of … wrongdoing”) and negligence (“one who should have known of a similar risk but, in fact, did not”) do not. Global–Tech, 563 U.S. at 769–71. The Court reaffirmed this holding in 2015, stating that contributory patent infringement “requires proof the defendant knew the acts were infringing,” and that Global–Tech “was clear in rejecting any lesser mental state as the standard.” Commil USA, LLC v. Cisco Sys., Inc., 135 S.Ct. 1920, 1928 (2015). The Court expressly rejected the possibility “that a person, or entity, could be liable even though he did not know the acts were infringing.” Thus, in the patent context, it is clear that contributory infringement cannot be based on a finding that a defendant “should have known” of infringement.

In both Grokster and Sony, the Supreme Court adopted now-codified patent law doctrines—the staple article doctrine and the inducement rule. The Court did so because of the historic kinship between patent law and copyright law, and the similar need in both contexts to impose liability on culpable expression and conduct without discouraging the development of technologies with lawful and unlawful potential. We are persuaded that the Global–Tech rule developed in the patent law context, which held that contributory liability can be based on willful blindness but not on recklessness or negligence, is a sensible one in the copyright context. It appropriately targets culpable conduct without unduly burdening technological development.

We therefore hold that proving contributory infringement requires proof of at least willful blindness; negligence is insufficient.

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Check Your Understanding – BMG Rts. Mgmt. 

Question 1. True or false: Under Sony, if a product can be substantially used lawfully, its producer cannot be contributorily liable for copyright infringement.

Question 2. Why did the district court err in BMG Rts. Mgmt. when it instructed the jury that it could impose liability for contributory infringement if it found “Cox knew or should have known of [the] infringing activity”?

Some things to consider when reading Sony Music Ent.:

1. In BMG Rts. Mgmt., the case immediately preceding this one in the casebook, we saw that the district court had erred in instructing the jury as to the intent requirement for proving contributory infringement, with the Fourth Circuit holding that liability can be based on willful blindness but not on recklessness or negligence. The case went back to the jury, and ultimately its decision went before the Fourth Circuit again in the following decision.
2. Why does the Fourth Circuit affirm the jury’s finding of willful contributory infringement, but reverse the vicarious liability verdict?
3. Why did the Fourth Circuit conclude that Napster had a direct financial interest in its users’ exploitation of copyrighted music, but AOL did not?
4. According to the Fourth Circuit, under what circumstances can the sale of a product with both lawful and unlawful uses suggest an intent to cause infringement?

Sony Music Ent. v. Cox Commc’ns, Inc.,

93 F.4th 222 (4th Cir. 2024)

RUSHING, Circuit Judge:

Defendant Cox Communications sells internet, telephone, and cable television service to 6 million homes and businesses across the United States. Plaintiffs—Sony Music Entertainment and numerous other record companies and music publishers—own some of the most popular copyrighted musical works of our time. Some users of Cox’s internet service infringed Plaintiffs’ copyrights by downloading or distributing songs over the internet without permission. Rather than sue those individuals, Plaintiffs sued Cox, seeking to hold it responsible for its customers’ copyright infringement.

This case proceeded to trial on two theories of secondary liability: vicarious and contributory copyright infringement. The jury found Cox liable for both willful contributory and vicarious infringement of 10,017 copyrighted works owned by Plaintiffs and awarded $1 billion in statutory damages. Cox appealed.

We affirm the jury’s finding of willful contributory infringement. But we reverse the vicarious liability verdict and remand for a new trial on damages because Cox did not profit from its subscribers’ acts of infringement, a legal prerequisite for vicarious liability.

I.

This lawsuit began when Sony and other owners of copyrighted musical works (collectively, Sony or Plaintiffs) sued Cox for infringement committed by subscribers to Cox’s internet service from 2013 to 2014. During the claim period, Cox provided internet service to residential and commercial subscribers, charging different flat fees for different download speeds according to a tiered pricing plan.

Plaintiffs are members of the Recording Industry Association of America (RIAA), which hired the anti-piracy company MarkMonitor to catch infringements of its members’ copyrights on peer-to-peer networks using file-sharing protocols like BitTorrent and others. When MarkMonitor discovered an internet user downloading or distributing a copyrighted music file, it notified the user’s internet service provider. Only the service provider can match an alleged infringer’s internet protocol address to its owner’s identity. When Cox received infringement notices from MarkMonitor, Cox’s automated system sent notices to the infringing subscribers. The notice Cox sent varied by how far along the subscriber was in Cox’s thirteen-strike policy, ranging from an email warning to a temporary suspension.²

MarkMonitor sent Cox 163,148 infringement notices during the claim period. Over that time, Cox terminated 32 subscribers for violation of its Acceptable Use Policy, which prohibits copyright infringement among other things. By comparison, it terminated over 600,000 subscribers for nonpayment over that same time. Frustrated with Cox’s lackluster response to the notices, Sony sued Cox for vicarious and contributory copyright infringement.

After discovery, Sony and Cox cross-moved for summary judgment. Two of the district court’s rulings at that stage are relevant for this appeal. First, the district court concluded that the infringement notices MarkMonitor sent to Cox proved Cox’s knowledge of infringement as a matter of law. That knowledge established one element of contributory liability. Second, the district court denied Cox’s motion to reduce the number of copyrighted works in suit.

The parties presented their case to the jury over the course of twelve days. Plaintiffs limited their case to Cox subscribers who received three or more infringement notices. In the end, the jury found Cox liable for vicarious and contributory infringement of all 10,017 copyrighted works alleged. The jury also found that Cox’s infringement was willful, which increased the available maximum statutory damages to $150,000 per work. See 17 U.S.C. § 504(c)(1)–(2). The jury awarded Sony $99,830.29 per infringed work, for a total of $1 billion in statutory damages.

II.

We begin with Cox’s contention that the district court erred in denying it judgment as a matter of law on Sony’s vicarious infringement claim. A defendant may be held vicariously liable for a third party’s copyright infringement if the defendant [1] profits directly from the infringement and [2] has a right and ability to supervise the direct infringer. Cox contests both elements on appeal. Because we conclude Sony failed, as a matter of law, to prove that Cox profits directly from its subscribers’ copyright infringement, we do not reach the additional question of Cox’s right and ability to supervise its subscribers.

Cox argues that it does not profit directly from its subscribers’ infringement because “all subscribers pay Cox a flat monthly fee for their internet access package no matter what they do online.” Whether a subscriber uses her internet access for lawful or unlawful purposes, Cox receives the same monthly fee, and a subscriber’s decision to download or distribute a copyrighted song without permission does not benefit Cox. The district court rejected this argument, concluding that Sony had proven Cox’s direct financial interest by showing that Cox repeatedly declined to terminate the accounts of infringing subscribers in order to continue collecting their monthly fees. To understand this issue, some legal background is necessary.

The landmark case on vicarious liability for infringing copyrighted musical recordings is Shapiro, Bernstein & Co. v. H. L. Green Co., 316 F.2d 304 (2d Cir. 1963). There a department store was held accountable for the infringing sale of “bootleg” records by a concessionaire operating in its stores. The store retained the ultimate right to supervise the concessionaire and its employees, demonstrating its control over the infringement. And the store received a percentage of every record sale, “whether ‘bootleg’ or legitimate,” giving it “a most definite financial interest” in the infringing sales.

Courts have recognized, however, that a defendant may possess a financial interest in a third party’s infringement of copyrighted music even absent a strict correlation between each act of infringement and an added penny of profits. For example, Fonovisa concerned the operator of a swap meet who allowed vendors to sell infringing records. The complaint alleged that the operator collected “admission fees, concession stand sales and parking fees”—but no sales commission—“from customers who want[ed] to buy the counterfeit recordings at bargain basement prices.” These allegations sufficed to state a direct financial benefit to the swap meet operator, the court held, because “the sale of pirated recordings at the … swap meet [was] a ‘draw’ for customers.” The infringing sales “enhance[d] the attractiveness of the venue to potential customers,” giving the swap meet operator a financial interest in the infringement sufficient to state a claim for vicarious liability.

Applying these principles to copyright infringement in cyberspace, courts and Congress agree that “ ‘receiving a one-time set-up fee and flat periodic payments for service’ ” from infringing and noninfringing users alike ordinarily “ ‘would not constitute receiving a financial benefit directly attributable to the infringing activity.’ ” Ellison v. Robertson, 357 F.3d 1072, 1079 (9th Cir. 2004) (quoting S. Rep. 105-190, at 44 (1998)). But “ ‘where the value of the service lies in providing access to infringing material,’ ” those flat fees may constitute a direct financial benefit. Id. (quoting S. Rep. 105-190, at 45).

For example, the file-sharing service Napster had a direct financial interest in its users’ exploitation of copyrighted music. An increasing volume of pirated music available for download drew more users to register with Napster, and its “future revenue [was] directly dependent upon increases in userbase.” Napster, 239 F.3d at 1023.

By contrast, America Online (AOL) was not vicariously liable for copyright infringement occurring over an online forum to which it provided its subscribers access. Although access to online forums encouraged overall subscription to AOL’s services, there was no direct financial benefit from infringement where no evidence indicated “that AOL customers either subscribed because of the available infringing material” or “canceled subscriptions” when the material was no longer available. Ellison, 357 F.3d at 1079. Without “evidence that AOL attracted or retained subscriptions because of the infringement or lost subscriptions because of [its] eventual obstruction of the infringement,” “no jury could reasonably conclude that AOL received a direct financial benefit from providing access to the infringing material.”

As these cases illustrate, the crux of the financial benefit inquiry is whether a causal relationship exists between the infringing activity and a financial benefit to the defendant. If copyright infringement draws customers to the defendant’s service or incentivizes them to pay more for their service, that financial benefit may be profit from infringement. See, e.g., EMI Christian Music Grp., Inc. v. MP3tunes, LLC, 844 F.3d 79, 99 (2d Cir. 2016). But in every case, the financial benefit to the defendant must flow directly from the third party’s acts of infringement to establish vicarious liability. See Grokster, 545 U.S. at 930 & n.9,

To prove vicarious liability, therefore, Sony had to show that Cox profited from its subscribers’ infringing download and distribution of Plaintiffs’ copyrighted songs. It did not.

The district court thought it was enough that Cox repeatedly declined to terminate infringing subscribers’ internet service in order to continue collecting their monthly fees. Evidence showed that, when deciding whether to terminate a subscriber for repeat infringement, Cox considered the subscriber’s monthly payments. To the district court, this demonstrated the requisite connection between the customers’ continued infringement and Cox’s financial gain.

We disagree. The continued payment of monthly fees for internet service, even by repeat infringers, was not a financial benefit flowing directly from the copyright infringement itself.³ As Cox points out, subscribers paid a flat monthly fee for their internet access no matter what they did online. Indeed, Cox would receive the same monthly fees even if all of its subscribers stopped infringing. Cox’s financial interest in retaining subscriptions to its internet service did not give it a financial interest in its subscribers’ myriad online activities, whether acts of copyright infringement or any other unlawful acts. An internet service provider would necessarily lose money if it canceled subscriptions, but that demonstrates only that the service provider profits directly from the sale of internet access. Vicarious liability, on the other hand, demands proof that the defendant profits directly from the acts of infringement for which it is being held accountable.

While Cox profited from the sale of internet service, Sony has not shown that Cox, in any sense, had a financial interest in its subscribers committing infringement. And it is the infringement itself that must in some fashion profit the defendant for vicarious liability to attach. Accordingly, under the correct legal standard, no reasonable jury could find that Cox received a direct financial benefit from its subscribers’ infringement of Plaintiffs’ copyrights. We therefore conclude that Cox is not vicariously liable for its subscribers’ copyright infringement and reverse the district court’s denial of Cox’s motion for judgment as a matter of law.

III.

We turn next to contributory infringement. Under this theory, one who, with knowledge of the infringing activity, induces, causes or materially contributes to the infringing conduct of another’ is liable for the infringement, too. The district court resolved the question of Cox’s knowledge on summary judgment, while the jury found material contribution at trial, so we address Cox’s challenge to each element separately.

A.

Our Court has recently clarified the intent necessary to prove contributory infringement by an internet service provider based on its subscribers’ direct infringement. In BMG Rights Management v. Cox Communications, we held that intent to cause infringement may be shown by willful blindness—which is not at issue in this appeal—or by knowledge that infringement was substantially certain to result from the sale of internet service to a customer. General knowledge of infringement occurring on the defendant’s network is not enough; selling a product with both lawful and unlawful uses suggests an intent to cause infringement only if the seller knows of specific instances of infringement. Applying these principles to Cox in that case, we held that Cox could not be contributorily liable absent knowledge that infringement was substantially certain to result from Cox’s continued provision of Internet access to particular subscribers.

As BMG suggests, in this scenario, knowledge that particular subscribers are substantially certain to infringe is a predictive question. We reasoned in BMG that knowledge of past infringement is relevant to proving this element. Here, Cox produced data purporting to show the effectiveness of each step of its thirteen-strike policy at reducing future infringement, which could also be relevant. And Sony highlights internal emails implying that Cox continued providing internet service to certain habitual infringers despite believing they would infringe again. A jury could consider this and other evidence to determine whether, when Cox continued providing internet service to customers receiving three or more infringement notices, it knew they were substantially certain to infringe Plaintiffs’ copyrights by, for example, downloading another song or distributing a song they had previously downloaded.

B.

Moving to the material contribution element of contributory liability, Cox appeals the district court’s denial of its renewed motion for judgment as a matter of law. The district court declined to disturb the jury’s contributory liability verdict because sufficient evidence supported a finding that Cox materially contributed to its subscribers’ direct infringement of Plaintiffs’ copyrights. As the court explained, Cox’s internet service “was indispensable to each instance of peer-to-peer infringement on its network.” And, considering the evidence in the light most favorable to Plaintiffs, a reasonable jury could have found that Cox provided that service with actual knowledge of infringement occurring “on specific subscribers’ accounts, yet failed to address that infringement occurring on its network.

Cox makes two principal objections. The first rests on the contention that it cannot be liable for materially contributing to copyright infringement because the internet service it provides is capable of substantial lawful use and not designed to promote infringement. We rejected that argument in BMG: “In fact, providing a product with ‘substantial non-infringing uses’ can constitute a material contribution to copyright infringement.” 881 F.3d at 306.

Second and similarly, Cox claims its contribution must amount to culpable conduct equivalent to aiding and abetting the infringement, and that failing to prevent its subscribers’ infringement does not suffice. This argument ignores the evidence before the jury.

It is true that mere failure to take affirmative steps to prevent infringement does not establish contributory liability in the absence of other evidence of intent. Grokster, 545 U.S. at 939 n.12. But supplying a product with knowledge that the recipient will use it to infringe copyrights is exactly the sort of culpable conduct sufficient for contributory infringement. For example, in BMG we reasoned that leasing a VCR to a customer—innocent conduct by itself—can support contributory liability if the lessor knows the customer is substantially certain to use it for copyright infringement. In such a situation, providing the means to infringe is culpable pursuant to the common law rule that a person is presumed to intend the substantially certain results of his acts. This accords with principles of aiding and abetting liability in the criminal law. Lending a friend a hammer is innocent conduct; doing so with knowledge that the friend will use it to break into a credit union ATM supports a conviction for aiding and abetting bank larceny.

The evidence at trial, viewed in the light most favorable to Sony, showed more than mere failure to prevent infringement. The jury saw evidence that Cox knew of specific instances of repeat copyright infringement occurring on its network, that Cox traced those instances to specific users, and that Cox chose to continue providing monthly internet access to those users despite believing the online infringement would continue because it wanted to avoid losing revenue. Sony presented extensive evidence about Cox’s increasingly liberal policies and procedures for responding to reported infringement on its network, which Sony characterized as ensuring that infringement would recur. And the jury reasonably could have interpreted internal Cox emails and chats as displaying contempt for laws intended to curb online infringement. To be sure, Cox’s anti-infringement efforts and its claimed success at deterring repeat infringement are also in the record. But we do not weigh the evidence at this juncture. The evidence was sufficient to support a finding that Cox materially contributed to copyright infringement occurring on its network and that its conduct was culpable. Therefore we may not disturb the jury’s verdict finding Cox liable for contributory copyright infringement.

For the foregoing reasons, we reverse the district court’s order denying Cox judgment as a matter of law on Sony’s claim of vicarious copyright infringement. We affirm the district court’s orders denying Cox relief from the jury’s contributory infringement verdict.

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Check Your Understanding – Sony Music Ent.

Question 1. In Sony Music Ent., why did the Fourth Circuit reverse the jury’s vicarious liability verdict?

Question 2. Why does the court in Sony Music Ent. conclude that Napster had a direct financial interest in its users’ infringement of copyrighted music, but AOL did not?

Question 3. According to the Sony Music Ent. court, under what circumstances can the sale of a product with both lawful and unlawful uses suggest an intent to cause infringement?

FOOTNOTES: