Judge Tosses DMCA Defenses, Creating Unexpected Copyright Liability For Web Services In New York

Editor’s note: Sid Venkatesan is an IP partner specializing in high stakes IP disputes and IP counseling for technology companies in the Silicon Valley office of Orrick, Herrington & Sutcliffe LLP. James Freedman is an associate in Orrick’s IP group and a recent Stanford Law School graduate. 

A New York appellate court has recently ruled in UMG Recordings v. Escape Media Group that the safe harbor protections that Congress designed for Internet companies do not cover sound recordings made before 1972. The decision is a new and unexpected break with earlier decisions by state and federal trial courts.

As a result, Internet companies that host or transmit songs before 1972, including hits from The Beatles, The Rolling Stones, and Elvis Presley, may no longer rely upon the DMCA’s safe harbors to insulate them from potentially crippling legal liability as a result of copyright infringement that arises from downloading, hosting or transmitting copyrighted sound recordings.

The Decision

Escape Media Group, which owns the Grooveshark music hosting site, was sued by Universal Music Group, a major rights-holder, in New York state court for infringing UMG copyrights in pre-1972 works. Grooveshark permits users to upload recordings to its servers and lets other users stream that music. UMG sued Grooveshark for hosting UMG-owned copyrighted songs from prior to 1972 without a license.

Grooveshark argued in the trial court that its services were protected by the DMCA safe harbors, specifically Section 512(c). As we’ve discussed before, this safe harbor immunizes service providers that host user uploaded content so long as the service provider posts a DMCA policy, adheres to DMCA notice and takedown provisions, and complies with other formalities. The trial court agreed with Grooveshark (as well as an earlier federal court decision) and found that Grooveshark’s hosting of pre-1972 songs was protectable under the DMCA. UMG appealed, and on April 23, this decision was reversed by a New York appellate judge that found the DMCA safe harbors inapplicable to copyright infringement of sound recordings created before 1972.

Why does 1972 matter? In 1971, Congress amended the U.S. Copyright Act to include federal protection for sound recordings “fixed” on February 15, 1972. At the same time, Congress included in Section 301(c) of the Copyright Act that “any rights or remedies under the common law or statutes of any State shall not be annulled or limited” by the Copyright Act until 2067. UMG argued that it had common law rights in sound recordings fixed before February 15, 1972 and its rights could not be annulled by the DMCA safe harbors.

Grooveshark countered with a public policy point, arguing that Congress could not have intended the Copyright Act to be read in this way, as it would “eviscerate the DMCA.” Unluckily for Grooveshark, shortly before this decision was issued, the U.S. Copyright Office sent a letter to Congress stating that the DMCA did not cover pre-1972 sound recordings, and urged Congress to fix the issue. At the end of the day, the appellate court rejected Grooveshark’s position and held that pre-1972 sound recordings were not covered based on the text of Section 301(c) and the legislative history. The court punted the issue back to Congress, stating “it would be far more appropriate for Congress, if necessary, to amend the DMCA to clarify its intent, than for this Court to do so by fiat.”

The Aftermath

Though it has its critics, the DMCA provides Internet services, including content-hosting sites, certain peer-to-peer services, search engines and ISPs with defined protections from copyright infringement claims based on the transmission, downloading, uploading, caching, or linking to digital copyrighted content. Under Section 512, the DMCA protects four types of Internet services — called “service providers” under the Act: 1) conduits, like ISPs, that transmit material through a network; 2) caching services; 3) service providers like YouTube or Veoh that store user uploaded content; and 4) information location tools, like search engines. The DMCA also exempts nonprofit educational institutions from liability.

With this decision, those protections may have gone up in smoke. Therefore, Internet companies hosting pre-1972 sound recordings can face claims for actual damages and injunctions under common law. Actual damages can be substantial. For example, BlueBeat.com settled a lawsuit for approximately $1 million for claims to streaming and selling Beatles songs, many of which were recorded prior to 1972. On the flip side, since this decision applies to state common-law copyright protections, it means that service providers may be clear of the worst penalties for copyright infringement for infringement of pre-1972 sound recordings. Under federal law, which would be subject to the DMCA, a service provider can face “statutory damages” that can range from $750 to $30,000 per work (meaning that, for example, a service that is found to host 1,000 infringing copyrighted songs could be hit with a $30 million award).

Further, though UMG has won the day in New York, there remain a lot of uncertainties regarding its claim. The copyright rules of the road that have developed in cases involving Internet companies have developed in connection with claims arising under the federal law. It is uncertain how legal issues, like the determination of indirect liability, the evaluation of affirmative defenses (such as fair use and “Betamax defense”), and the calculation of damages will occur under New York common law.

As a result of this case, Internet companies with a presence in New York (and perhaps other states, should this decision prove persuasive in other states) are now facing a two-regime copyright system and will face increased regulatory costs as a result. Going forward, these companies should take a hard look at what content is hosted, transmitted or cached through their services using, for example, logging techniques or third-party systems, such as the Content ID systems employed by sites like YouTube, to audit content on their service. This can inform appropriate action—either identifying a need for content licenses or a need to engage in increased technical self-help measures to curb infringement.

These costs are obviously unwelcome for technology companies, and we expect that this decision may fuel the drumbeat for Congress to act to amend the Copyright Act to correct this statutory loophole.

[This column reflects Sid’s and James’ general views and does not constitute legal advice or the views of Orrick or its clients.]

[Image Flickr]