On Monday, Judge Matz of the Central District of California dismissed without prejudice UMG’s complaint against Veoh’s investors.  UMG had alleged copyright infringement against the investors under theories of secondary liability: contributory copyright infringement, vicarious liability, and inducement to infringe.

Contributory Copyright Infringement

To be liable for contributory infringement, the defendant must [1] have knowledge or reason to have knowledge of direct infringement and [2] must provide material assistance to the infringer. See A & M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1019-22 (9th Cir. 2001).  Stated the court:

Merely exercising ownership power to select members for a Board of Directors cannot invite derivative liability for infringement. Nor is there a common law duty for investors (even ones who collectively control the Board) “to remove copyrighted content,” in light of the DMCA. Similarly, the mere objective of increasing the value of ownership is neither invidious nor a sufficiently “direct” benefit within the meaning or context of derivative liability for infringement.

Vicarious Liability

A party may be vicariously liable if it has [1] the right and ability to supervise the infringing activity, and [2] has a direct financial interest in the infringing activities. See Napster, 239 F.3d at 1022.  The Court found that the alleged financial benefit was too far removed from the alleged infringement to be considered a “direct” financial interest.

In this case, unlike Fonovisa, Ellison, and Napster, the alleged financial benefit that the Investor Defendants might some day enjoy will not come directly from Veoh’s users or from Veoh’s advertisers. Rather, the [complaint] alleges that the alleged infringement “continue[d] to attract users and advertising dollars to Veoh, and increase[d] the value of [the Investors Defendants’] financial interests in Veoh.” The [complaint] does not allege that the investors received, or will receive, fees paid by customers or even by advertisers. Nor does the FAC allege that Veoh has paid or will pay any dividend or distribution to the Investor Defendants. It only alleges that “each will profit from their investments through the sale of Veoh to a potential acquiring company or through a public offering” [citation omitted.]

Inducement to Infringe Copyright

A party may be liable for Inducement to infringe copyright if they distribute 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.  See Metro-Goldwyn-Mayer Studios Inc., et al. v. Grokster, Ltd., et al., 545 U.S. 913, 936-37 (2005).  Judge Matz found that the complaint didn’t allege that investors “encouraged infringement by Veoh or by Veoh’s users in connection with the use or “distribution” of Veoh’s service.”

Where are we now?

While the Court granted UMG until February 23 to file an amended complaint, the order contained a rather stern caution:

Although Plaintiffs may file a Second Amended Complaint, they should reflect carefully what is likely to result if they do so. The Court’s existing scheduling requirements and the near certain additional costs and complications that will flow from attempting to go after deep pockets whose potential liability could entail vexing issues of corporate governance caution that “less may be more.”

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