UMG Recordings, Inc. v. Veoh Networks Inc. (C.D. Cal. 2009)

We last checked in on UMG v. Veoh in early February. At the time, Judge A. Howard Matz dismissed a series of secondary liability claims against Veoh’s investors, including contributory infringement, vicarious infringement and inducement to infringe. The previous claims where dismissed without prejudice providing UMG the opportunity to do some more fishing and refile if it so desired. The previous order for dismissal, however, ended with a rather stern signal for where the Court stood on the issue of secondary liability for investors:

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.”

UMG decided to file a second amended complaint alleging secondary liability claims against Veoh’s investors, nonetheless. The Court, last Tuesday, addressed the claims after the additional discovery, finding that few new allegations of substance were uncovered. Regardless, the discussion of the allegations as they are is certainly interesting:

Although the[ new] details are titillating insofar as they offer a glimpse into the inner workings of Veoh and its Board of Directors, they boil down to allegations that overlap almost entirely with the allegations of the FAC: the Investor Defendants knew that infringing activity was occurring on Veoh’s site; as board members and financial supporters of Veoh the Investor Defendants could have done more to prevent this activity, such as implementing filtering software or hiring employees to ferret out infringing content; and the Investor Defendants hoped to eventually profit from their investment in Veoh, and thus sought to attract more users to Veoh by providing funding and by implementing policies that “facilitated more infringement.”

The only allegations that are arguably new are that the Investor Defendants’ principals sometimes acted as the “public face” of Veoh, and that the Board considered copyright matters. But these allegations do not support UMG’s infringement claims. The “public face” allegations simply claim that the investors (a) explained Veoh’s policies to the public, and (b) sought relationships with content providers. Neither of these allegations suggests anything unlawful. In fact, the allegations concerning relationship building, including an attempt to form an agreement with UMG, actually suggest that the investors were actively seeking to ensure that copyrights were not violated. In addition, the fact that the Board considered copyright matters at its meetings is neither surprising nor damning. If the Board had not considered copyright matters, UMG would likely claim that it had been derelict in its duties.

The Court found, once again, that the merits of secondary liability for copyright infringement didn’t trump the benefits of corporate governance structures. The claim was dismissed with prejudice so this issue is now preserved for appeal, which I would anticipate is forthcoming given UMG’s tactical decision to file a second amended complaint:

In the absence of clear precedent, this Court is not willing to expand the scope of copyright liability in a manner that presents a substantial risk of upending well established concepts of corporate governance. Although the judicially-fashioned principles of secondary copyright liability serve an important purpose, UMG’s proposed extension of these principles would likely invite a wholesale weakening of the no less important principle that the corporate form is meant to protect shareholders, directors, and officers from ordinary liability. To allow for derivative copyright liability to be imposed on these Investor Defendants would be particularly problematical. The vast and rapid expansion of software technology in telecommunications is generally beneficial to our economy and society, and we should not erect obstacles to that growth in the absence of sound legal and policy-based reasons.