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Invest In An Internet Video Start-up And Get Sued

How Michael Eisner Avoided Liability

In yet another of a long line of cases involving copyright infringement, we now have the case of UMG Recordings v. Shelter Capital Group, where Universal Music Group attempted to get around the Digital Millenium Copyright Act by suing the investors in video-sharing case, with hints of Napster-like allegations.  UMG sued Veoh, a web-sharing site for videos.

Unlike Napster, however, Veoh took all kinds of pains to ensure that it was not posting videos that were protected by copyright.  In the Court's words, "Veoh also began developing an additional filtering method of its own, but in 2007 opted instead to adopt a third-party filtering solution produced by a company called Audible Magic. Audible Magic’s technology takes audio “fingerprints” from video files and compares them to a database of copyrighted content provided by copyright holders. If a user attempts to upload a video that matches a fingerprint from Audible Magic’s database of forbidden material, the video never becomes available for viewing."

That's a lot of effort, but it doesn't address the most interesting aspect of Universal's case against Veoh's investor.

That's right.  Read that last line again.  Universal sued Veoh's investors for vicarious infringement, contributory infringement and inducement of infringement.  Gives a whole new meaning to being an angel investor, one of whom was Michael Eisner.  The Court noted, "UMG argues, however, that ... "the [Investor] Defendants remain potentially liable for their related indirect infringement" because ... the Investor Defendants do not qualify as "service providers" who can receive DMCA safe harbor protection."

While the Court held that Veoh was protected by the DCMA for reasons noted in the opinion, it analyzed the contributory copyright infringement claim under the "site and facilities" test first announced in Fonovisa v. Cherry Auction, a test that was used to shut down Napster and hold one investor liable for the copyright infringment because that investor was able to control the start-up's funding, and directed its spending, holding significant power over Napster's operations.

Unlike Napster, however, Michael Eisner was not the only investor.  The Court found that the three investors who were on Veoh's Board of Directors did not  either singly or with the other investors, individually control Veoh's operations to the point that would make them liable to UMG. 

Unfortunately for UMG, its Complaint did not make that allegation, and so the Court found that the "three investors individually acquiring one seat apiece is not the same as agreeing to operate as a unified entity to obtain and leverage majority control. Unless the three independent investors were on some level  working in concert, then none of them actually had sufficient control over the Board to direct Veoh in the way UMG contends."

So, the lesson here is at least two-fold.  Read the copyright cases beforehand and ensure that you know how to properly plead around these issues, and if you're an investor, make sure you're not the only one, and make sure you don't work together with the other investors to control your start-up.

And finally, just go ahead and pay Universal its fees to play its music.

 

 

Posted by J. Craig Williams on Wednesday, January 11, 2012


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