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Yesterday, Viacom (NASDAQ:VIA) sued YouTube and its owner Google (NASDAQ:GOOG) for damages in excess of $1 billion for infringing Viacom’s copyrights. (See Seeking Alpha's news brief and the PDF of Viacom's lawsuit.) Viacom is the media giant which owns television programming including MTV, Nickelodeon, Comedy Central and movie studios including Dreamworks and Paramount. Viacom claims that YouTube has actively infringed Viacom’s copyrighted works by publicly performing these movies on its website, and by permitting copies to be embedded in websites across the Net. Although YouTube has the technology to filter copyright infringing material, Viacom claims that it has done nothing to prevent or curtail this massive infringement.

Legislative Background: Digital Millennium Copyright Act

Central to Viacom’s claim is how the court will interpret provisions of the Digital Millennium Copyright Act. The DMCA is a 1998 statute that balances the needs of content owners, such as Viacom, with those of internet service providers, including sites such as YouTube, which host content uploaded by users. The DMCA provides that sites do not need to monitor their site for infringing material. Rather, by means of a notice-and-takedown procedure, if a copyright owner complains, the site enjoys a “safe harbor” from monetary damages if it takes down the infringing material.

Sites such as YouTube are not entitled to the safe harbor, however, if they are “aware of facts or circumstances from which infringing activity is apparent”.

Under What Circumstances Does a Website Lose its DMCA Safe Harbor Protection?

Awareness of Infringing Activity. The question which Viacom raises is whether YouTube was aware of such widespread infringement that it will no longer be able to benefit from the safe harbor. Cases interpreting the DMCA have been very protective of websites. For example, in the case of Hendrickson v. eBay, Inc., 165 F. Supp. 2d 1082 (C.D. Cal. 2001), the owner of the film documentary “Manson” sued eBay for offering for sale copies of his movie. The court held that eBay was entitled to the safe harbor protection. Similarly, in CoStar Group v. LoopNet, a Fourth Circuit case from 2004, the court held that a website was not liable for infringing photos of real estate posted to its site from users.

The DMCA’s legislative history says that a site will not be able to benefit from the safe harbor if there is a “red flag” that infringing activity is taking place. Because of the mass of infringing videos on YouTube’s site, the question will be: Should YouTube have seen the red flag? The legislative history does not give an indication of how big or red that flag must be, and no case has addressed this issue. This may be the first to do so.

Financial Benefit. The DMCA also provides that YouTube will not benefit from the safe harbor if it “receives a financial benefit directly attributable to the infringing activity.” The legislative history would seem to provide arguments for both sides. YouTube’s position is strengthened since the Senate Report on the DMCA states that there would be no direct financial benefit in the case where “the infringer makes the same kind of payment as non-infringing users of the provider’s service.” Nevertheless, Viacom could argue, from the Legislative history, that courts are supposed to apply a “common-sense, fact-based approach and not a formalistic one.” Viacom could argue that the value of the YouTube service lies in providing access to infringing material, and therefore, it does receive a direct financial benefit from the infringement.

In practice, courts seem to be influenced by the amount of infringing activity on a site. In the 2001 case of Adobe Systems v. Canus Productions, for example, the court held that the operator of a computer fair was not liable to Adobe because only about 100 copies of the infringing software were being sold, and that this was not a major attraction for the 15,000 people who attended. Similarly, in the CoStar v. LoopNet case, the court held that the direct financial benefit test was not met. In that case, plaintiff claimed that 300 of the 33,000 photographs of commercial real estate infringed its copyrights. But in the case of A&M Records v. Napster, the amount of infringing music on the site was a major factor holding the site liable for vicarious copyright infringement. Accordingly, an important question will be whether the court addresses the relevance of a significant amount of infringing material on the YouTube site.

This case may also address two other critical questions under the DMCA:

  • Requirement to Monitor? Is YouTube required to monitor its site for copyright infringing material if it has the technology to do so? This would upend the basic assumption of the DMCA—that site owners are not required to censor, filter or preview material, and therefore I would be surprised if the court would require active monitoring. YouTube has been quoted as saying that it would only use copyright protection measures for parties which entered into a licensing arrangement with it. Although courts, such as in Grokster, have been reluctant to require companies to design their products in a way to minimize infringement, the question is whether YouTube, which has this technology, and knows of infringing activity on its site, is required to apply this technology. This could have a big impact for whether sites must actively monitor their activity.
  • Specificity of DMCA Notice. How specific do the notices of infringing material need to be? Can Viacom, for example, just say to YouTube, “All clips from MTV are infringing. You go find and take down those clips!” Or must Viacom provide the URL to each infringing file? Although this sounds like a very technical question, it has a meaningful practical influence on whether a site must proactively monitor its site for recurring infringements.

Application of the Grokster “Active Inducement” Theory. Another big issue for YouTube is how the court will apply the new “active inducement for copryight infringement” theory articulated in the 2005 Supreme Court decision of MGM Studios v. Grokster. In that case, the Supreme Court held Grokster liable for distributing peer-to-peer software because its business model was premised on infringement—it benefited from the high-volume use of infringing software. The question is whether the court will similarly say that YouTube is liable for actively inducing infringement because it benefits from advertising revenue which is directly tied to the quantity of infringing material. In addition, Viacom’s complaint focused heavily on YouTube’s active strategy of permitting videos to be embedded in sites throughout the net, and not just on www.youtube.com. In so doing, Viacom claims that YouTube has taken an active part in directly infringing Viacom’s copyright.

Conclusion

Many commentators believe that Viacom sued YouTube to obtain negotiating leverage to obtain a better licensing deal with YouTube. Others believe that it simply trying to gain publicity, and particularly to draw marketing attention to its deal with Joost.com, billed as “a new way of watching TV on the internet”. Because of the powerful arguments which Viacom has, due mainly to the widespread distribution of infringing material on YouTube’s site, as well as the strong defenses which YouTube can raise, due mainly to the structural protection of the DMCA, which provides a safe harbor for sites like YouTube, this could lead to a critical roadmap indicating whether user-posting sites can continue to expand rapidly.

If I had to guess, my view is that the case will settle rather than go to final judgment. Both sides have too much to lose with an unfavorable court decision. While the facts are difficult ones for YouTube, the law, particularly the DMCA, is in its favor, making the outcome of this case quite difficult to predict.

Source: How Strong is Viacom’s $1 bn Claim Against Google's YouTube?