DEEP POCKETS: THE RISKS OF BUYING WEBSITES WITH CONSUMER GENERATED CONTENT AND HOW THEY HOPE TO AVOID THE MAJOR LAWSUIT
By: Jonathan A. Hyman

Introduction

YouTube has become one of the most popular internet destinations with the post-Grokster generation, quickly gaining on juggernaut MySpace. By now, YouTube and MySpace are well known, quickly joining their more notable brethren, Google, AOL, and Yahoo!.

For those unfamiliar with YouTube, it is a free website which allows users to post video and audio clips to share with the world. Users post anything from homemade movies and music videos to clips of movies, TV shows, and sporting events. Current popular clips include Michael Richards' racial outburst at the Laugh Factory and clips from our soldiers serving in Iraq. MySpace is a social networking site which allows users to create a webpage about themselves and their interests and link to an ever-growing circle of friends.

While YouTube is not the only video hosting service (Google, AOL, Yahoo!, CNN, and Break.com have their own), and MySpace is not the only social networking site (Facebook.com, Friendster, and Xanga are among the others), they are by far the most popular, quickly becoming the internet destinations. According to YouTube, an estimated 6 million unique users visit the site daily, up from 3 million in December, and view more than 100 million videos a day. These numbers let YouTube live up to its motto: "Broadcast Yourself." MySpace boasts over 50 million registered users. Among websites worldwide, MySpace and YouTube are ranked the number 5 and 7 most popular websites respectively.

Both sites contain user generated original content. However, many of the clips and music on YouTube and MySpace include copyrighted material owned by third-parties that is available for free in its original form or combined with other video or audio.

Last year, News Corp. paid close to $600 Million for MySpace. More recently, Google paid $1.65 Billion for YouTube. Both News Corp. and Google are betting that the risks of owning sites with large volumes of allegedly infringing copyrighted materials will be outweighed by revenue generated form the sites.

Posting content to YouTube is simple and is done more than 65,000 times a day. Upload the video and YouTube encodes it, provides a player, and pays for bandwidth and server space. YouTube does have limits on what can be posted. Clips cannot exceed 10 minutes in length. Thus, YouTube is ill-suited for copying full length movies (unlike peer-to-peer sites). However, some users have tried to overcome this limitation by making multiple posts for longer material. Videos must not contain material that is unlawful, obscene, pornographic, or racist. YouTube does not allow material that is copyrighted, protected by trade secret or otherwise subject to third-party proprietary rights. However, YouTube does not currently screen videos before posting and relies on complaints from its users or IP owners to remove objectionable material.

YouTube and MySpace have been making IP owners restless as they try to figure out how to purge the large amount of copyrighted material from the sites. YouTube and MySpace's users' actions could subject them to direct liability for copyright infringement, as well as secondary liability under the theories of contributory and vicarious copyright infringement. So how are YouTube and MySpace "getting away" with it?

The DMCA

Both sites may be considered automated systems and therefore may have immunity from liability. In the Fourth Circuit's decision in Costar Group, Inc. v. Loopnet, Inc. 373 F.3d 544 (4th Cir. 2004), the court held that an online service provider ("OSP") that simply owns and manages a system used by others who are violating copyrights, and that is not an actual duplicator itself, is not directly liable for copyright infringement. Thus, current case law likely requires a volitional act from the YouTube and MySpace to attach liability.

In addition, both sites appear to be playing by the rules of the Digital Millennium Copyright Act (DMCA) and likely qualify for one of its safe harbors. The safe harbor provisions of the DMCA were enacted to limit the liability of OSPs for copyright infringement. Before the DMCA, courts inconsistently applied liability to OSPs. In some instances, courts found OSPs liable for copyright infringement because of user posted material, even if the material was posted without the OSP's knowledge. In other instances, such OSPs were not held liable for material posted by users. This uncertainty led to fears that the growth of the Internet would be stifled if clear guidelines were not adopted. The safe harbors were adopted as a less burdensome alternative to having OSPs monitor all users and to provide a quick and easy way for victims to get materials removed (much cheaper and faster than lawsuit). If YouTube and MySpace qualify for a DMCA safe harbor they are not liable for monetary damages.

The rationale behind the DMCA safe harbors is to protect OSPs from secondary copyright infringement liability so they do not have to monitor user's expression. Secondary copyright infringement attaches liability to those who do not take part in the act of direct infringement. There are two types of secondary copyright infringement, vicarious infringement and contributory infringement.

Under vicarious infringement, the acts must occur in an ongoing relationship between the direct infringer and one who has the right and ability to control the direct infringer and has a financial interest in the infringement. The element of control is the key to vicarious infringement. The typical example of vicarious liability is an employer being held liable for the acts of its employee.

Under contributory infringement, the contributory infringer, with knowledge of direct infringement, induces, causes or materially contributes to the direct infringe. Providing assistance is the key. The common example is the operator of a flea market which receives money because vendors sell pirated videos with his knowledge.

Some say there is a "new" subset of secondary infringement under the Supreme Court's Grokster decision: "intentional inducement." Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd., 125 S. Ct. 2764 (2005). Distribution of a product with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, might subject you to liability for the user's infringement.

An OSP qualifying for a safe harbor is not liable for monetary relief. Monetary relief includes damages, court costs, attorneys' fees and other forms of payment. The end user/actual infringer still remains liable for monetary damages under Section 106.

The DMCA gives protection for copyright infringement and not trademark infringement or violation of other rights such as rights of publicity or privacy, or liability. The downside of the DMCA is that OSPs bear the burden of notice and take down. Thus, the default is for OSPs to remove content rather than investigate whether it should be removed.

Applying the DMCA to YouTube and MySpace

There are five safe harbors (including an oft-forgotten safe harbor for non-profit educational institutions). The one applicable to YouTube and MySpace is for storage systems under Section 512(c). This safe harbor limits liability of OSPs for infringing material on websites hosted on their systems. To qualify for the DMCA safe harbors, YouTube and MySpace must meet certain requirements.

First, the safe harbor only provides protection if the content is stored at the direction of a user. As YouTube and MySpace's content is uploaded by their users, they meet this first requirement.

Second, an OSP must adopt and reasonably implement a policy for terminating users who are repeat infringers. YouTube has such a policy in its terms and conditions. YouTube defines a repeat infringer as a user "who has been notified of infringing activity more than twice and/or has had a User Submission removed from the Website more than twice." However, this policy is not the saving grace it was intended to be for copyright holders. It is easy for savvy internet users to create numerous (even limitless) additional or anonymous identities to circumvent such policies. MySpace's user agreement states that it will terminate membership privileges of any member who repeatedly infringes the copyright rights of others upon receipt of proper notification to MySpace.com by the copyright owner. However, MySpace does not define what "repeatedly infringes" means.

Third, an OSP must designate an agent with U.S. Copyright Office that will receive the notices from copyright owners requesting removal of infringing material. The U.S. Copyright Office's directory of agents can be found at http://www.copyright.gov/onlinesp/list/index.html.

Upon receiving proper notice of an infringement, YouTube responds quickly to remove the material. The elements of an effective notice are set out in Section 512(c)(3). An effective notice must include: the name, address, and electronic signature of the complaining party; the internet location of infringing materials (the more specific the better); sufficient information to identify the works infringed; a statement by the copyright owner that it has a good faith belief that there is no legal basis for the use of the materials complained of; and a statement of the accuracy of the notice signed under penalty of perjury.

It is important to note that a notice is not valid indefinitely and that it only applies to works identified in the notice at time it was sent. Thus, a complaining party will need a new notice for newly discovered infringing works. This can be quite problematic when it comes to YouTube and MySpace as the same material can be posted by numerous users under different titles or tags, making detection and removal difficult.

Under the DMCA, an OSP is not required to notify the individual responsible for the allegedly infringing material before it has been removed, but the OSP must notify the user if it is removed. Typically, OSPs remove material within 24-48 hours of receipt of a proper notice.

A user whose legitimate material has been removed from an OSP by an overzealous copyright holder is not without recourse. The user can send a "counternotice" under Section 512(g)(3) stating that the material has been wrongly removed. A proper counternotice must contain the following information: the user's name, address, phone number and physical or electronic signature; identification of the material and its location before removal; a statement under penalty of perjury that the material was removed by mistake or misidentification; and consent to local federal court jurisdiction, or if overseas, to an appropriate judicial body. If an OSP receives a proper counternotice it must promptly forward it to the claiming party. If the copyright owner does not bring a lawsuit in district court within 14 days, the OSP must restore the material.

Copyright owners should be cautious about making unsupported claims of infringement. Section 512(f) provides that anyone who fraudulently claims copyright infringement is liable to anyone who suffers any damages because of that misrepresentation, including court costs and attorneys' fees. Thus, the copyright holder can become liable to the OSP or the poster for any damages that resulted from the improper removal of the material.

Lastly, an OSP must not "receive a financial benefit directly attributable to the infringing activity" if it has the right and ability to control such activity. Section 512(c)(1)(B). This is the big issue for YouTube and MySpace. As noted above, YouTube and MySpace rely on users to police infringements and do not currently have filtering mechanisms to ensure copyrighted materials are not posted. YouTube has stated that it is developing filtering and fingerprinting software that will enable it to recognize copyrighted material and automatically remove the material from a website. MySpace has also developed its own copyright protection tool and licensed fingerprinting technology from Gracenote (the maker of the popular software that automatically fills in the track information on iTunes). This fingerprinting technology allows for automated removal of material once it has been identified by the software. It is questionable if this software will stem the tide of copyrighted material from the websites, as it is highly likely that users will find creative ways to get around the filtering and fingerprinting software. If it can be shown that YouTube and MySpace receive a direct financial benefit attributable to the infringing activity, they may fail to qualify for safe harbor protection.

Because YouTube and MySpace essentially store material at the direction of their users and comply with the requirements of the DMCA, they likely qualify for the storage safe harbor. If YouTube and MySpace fail to qualify for the storage (or any other) safe harbor they are not necessarily liable for copyright infringement. The copyright owner must still demonstrate that YouTube and MySpace have infringed and YouTube and MySpace can still use any defenses such as fair use or the Costar decision.

Numerous IP owners have contacted YouTube to remove their copyrighted material. NBC requested removal of "Saturday Night Live" skits posted in their entireties. American Airlines demanded that its in-house training video entitled "Flight Attendant, Upside Down" be removed. The RIAA has been sending notices to remove videos comprised of homemade music videos featuring copyrighted music. MySpace has faced similar complaints.

The Reaction of Copyright Owners

However, after the initial wave of fear regarding YouTube, major content producers have embraced YouTube and its growing audience. Under the terms of an agreement with NBC, YouTube will create an official NBC Channel to preview NBC's new shows and host exclusive clips from such shows as "Saturday Night Live," "The Office," and "The Tonight Show." The agreement also includes on-air promotion of YouTube on NBC. Recently, YouTube hosted a contest based on "The Office" where users submitted their own promos for the show and the winners will be shown on NBC. Similar arrangements have been made with production companies which have tried to stimulate interest in their movies by hosting trailers on YouTube. Lucasfilm requested removal of its original content, but has agreed to let the numerous Star Wars fan-made parodies remain.

CBS entered into a deal with YouTube in which CBS will provide YouTube with CBS-generated videos on a CBS Brand Channel on YouTube. As a result, CBS shows like "The Late Show With David Letterman" have become some of YouTube's most popular content, generating nearly 900,000 views a day. This was due in part to a promotional push from YouTube on its front page. In the first month of the deal, CBS uploaded over 300 clips and totaled over 29 million views. As part of the deal, YouTube will notify CBS when its materials have been uploaded to YouTube by users and allow CBS to decide whether the videos should stay up or be removed. If the videos remain on the site, CBS will share the revenue from the advertising placed adjacent to the videos.

Warner Music Group, Universal Music Group, and Sony BMG entered into deals with YouTube to allow users the ability to license music videos from them for use on YouTube. Information on the Sony deal indicated that users may be able to include certain SONY BMG sound recordings in their own uploads. SONY BMG and YouTube will share revenue from advertising on all SONY BMG music videos that incorporate audio and audiovisual works from the vast SONY BMG. But even as these content owners partner with YouTube, some international organizations are looking for their royalties. Recently, the Japanese Society for Rights of Authors and the German Society for Musical Performing and Mechanical Reproduction Rights demanded royalties or removal of their material from YouTube.

Another disparity in the reaction to content on YouTube occurred between two major sports leagues. While the NFL was requesting YouTube to remove its copyrighted materials, the NHL inked a deal with YouTube in which the NHL will provide daily short-form video content to YouTube for the 2006- 2007 season. The agreement will enable users to access video highlights of NHL regular season games, which will be available within 24 hours of the original broadcast.

MySpace has entered into similar deals with content owners to sell their content. MySpace prides itself on being an excellent promotional tool for unsigned and established bands, allowing artists to easily interact with their fans. Snocap has agreed to use MySpace to help sell songs from unsigned artists.

One IP owner has already asserted that YouTube does not fall under the DMCA safe harbor provisions and is liable under the Supreme Court's Grokster decision. Robert Tur of Los Angeles News Service (LANS) filed suit against YouTube seeking removal of his copyrighted videos of the beating of Reginald Denny and damages on the ground that YouTube intentionally induces infringement. In Grokster, the Supreme Court held that if an OSP distributes a product with the object of promoting its use to infringe copyrights, as shown by clear expression or other affirmative steps taken to foster infringement, then the OSP can be liable. Tur asserted that YouTube intentionally induces infringement because it derives a substantial benefit from the hosting of numerous copyright infringements. Tur argued that YouTube has actual knowledge of what particular copyrightable material is on its site. Tur further argued that even though YouTube allows for non-infringing uses, it is "intended to promote infringement of copyrighted works" and, paraphrasing the Grokster decision, is aimed at a "known source of demand for copyright infringement, e.g., the market comprised of former Grokster video 'sharers."'

Tur pointed out that YouTube has not developed or implemented any substantial filtering tools or other mechanisms to diminish the infringing activity. Tur argued that this failure, and its known perception as a "bootleg-heavy site," puts YouTube squarely in the same boat as Grokster. Tur submitted that YouTube's advertising sales generate revenue based on infringing activity and that it relies on infringing material to increase users, which in turn generates greater advertising revenue.

In addition, Universal Music Group, while taking a soft approach to dealing with YouTube, has taken an aggressive approach against MySpace. Universal Music Group filed a lawsuit on November 17, 2006 against MySpace alleging copyright infringement because it allowed users to upload music videos and aided the infringement by reformatting clips to allow users to transfer them to friends or post them to other sites.

Currently, YouTube displays very little advertising. According to YouTube's website, it is pursuing advertising as its business model and is exploring a range of possibilities, including sponsorships, context-based advertisements, and banner ads. YouTube's users have already begun griping over what affect increased advertising, whether through banners, pre- or post-roll commercials, or otherwise, will have on the popularity of the site. These business plans are likely just what Tur is counting on. The more money YouTube pulls in, the easier it may be to pull YouTube from its safe harbor and show that it has intentionally induced infringement. If discovery in the Tur case turns up evidence that YouTube was counting on infringing material to increase viewership, it will likely fall prey to Grokster's demise: marketing materials touting itself as the heir to Napster, including proposed materials flaunting Grokster's illegal uses. Only YouTube knows if similar smoking guns exist for its service.

Some say that YouTube has been using Google's coffers to post up handsome "license fees," some estimating 9 figure fees, to attract content from its rightful owners and avoid lawsuits from angry content owners. Whether these reports are true remains to be proven, but it could leave other less funded sites hanging in the wind to be sued. For example, Universal sued YouTube's competitors Bolt.com and Grouper for copyright infringement.

Conclusion

If Tur's lawsuit is successful, others will surely follow, as they try to reach Google's deep pockets. Google recently acknowledged rumors that it set aside some (12.5% or $200 million) of the YouTube purchase price to cover legal defenses of the site. Nevertheless, with Hollywood's recently developed attitude of joining new technologies before it is too late (See Warner's deal with peer-to-peer BitTorrent to distribute its movies), the fears over sites like MySpace and YouTube's negative impact may be exaggerated. It seems that at least some rights holders are learning to work with such sites by coming up with creative revenue models, rather than taking the extreme position of trying to shut them down and foregoing what is surely to become another entertainment revenue stream.