How Veoh Networks Battled Universal over File-Sharing

Then there was Veoh Networks. Launched in 2004 just three months after YouTube.com debuted, the San Diego-based online video company hosted both user-generated material (like YouTube) and high-resolution, professionally produced content (think Hulu.com). When it was sued, without warning, for copyright infringement by UMG in 2007, Veoh fought back. The result: a slam-dunk ruling in its favor in September 2009 that, if upheld on appeal, would have a big impact on the way major labels negotiate with emerging media and technology companies.

Suit Prompts Veoh's Dooms

The basis of UMG's claim against Veoh was the same one it has made against other tech companies: Veoh was guilty of wide-scale infringement because it let users post videos that included unapproved UMG'owned music. Veoh argued that it was immune to such a copyright claim because it fully complied with the Digital Millennium Copyright Act (DMCA). The company maintained that it promptly responded to any DMCA take-down notices it received from copyright holders and terminated the accounts of users who repeatedly broke copyright rules.

Veoh CEO Dmitry Shapiro said recently that even though he believed the company was on solid legal ground, the suit, combined with the recession, was nearly fatal. As the case proceeded, Veoh cut its workforce from more than 100 employees to about two dozen “hard-core” staffers. Meanwhile, Shapiro said, several companies that had shown interest in acquiring Veoh backed off. [Editor's note: Veoh laid off the rest of its staff in February 2010 and announced that it was filing for bankruptcy liquidation. Shapiro stated on his Web site: "The distraction of the legal battles and the challenges of the broader macro-economic climate have led to our Chapter 7 bankruptcy."]

It wasn't just the direct cost of litigation that hurt. UMG's legal tactics wreaked havoc on Veoh's day-to-day operations, Shapiro says: “They came after us with a 'shock and awe' campaign.” The suit forced Veoh to design systems to ensure that no videos it hosted were deleted ' even videos whose creators wanted them deleted. “We were prevented from doing any of that, simply because Universal said we had to store it. When you've got 23 million users processing data, that's really tough. For two years, my IT guys were walking around, saying, 'They're going to choke us.'”

Unlike other companies that decided it made sense to settle, Veoh could afford to fight UMG because it had more than $70 million in venture capital at its disposal. With that in mind ' and aware that investors naturally try to avoid spending development funds on legal bills ' UMG even attempted to include the venture capitalists backing Veoh as defendants in the suit. Judge Howard Matz of federal district court in Los Angeles rejected that hardball tactic.

Matz ruled in Veoh's favor on summary judgment, saying the company had indeed followed the DMCA to the letter and that UMG's copyright claim couldn't stand. If users uploaded video with copyrighted material, Matz ruled, it was the copyright holder's responsibility to go after the actual user or to send a take-down notice asking Veoh to remove the offending content. Veoh, represented by Winston & Strawn, had a history of complying with those notices within a day or two, Matz wrote. UMG Recordings Inc. v. Veoh Networks Inc., 665 F.Supp. 2d 1099 (C.D.Calif. 2009). UMG, represented by Irell & Manella, appealed the district court ruling to the U.S. Court of Appeals for the Ninth Circuit. [Editor's note: The future status of the appeal was unclear upon Veoh's bankruptcy filing.]

'The Copyright Wars'

At least for the moment, Matz's decision is among several developments that suggest a subtle shift in the ongoing IP disputes known collectively as the copyright wars. Most people now accept that the phenomenon of watching and sharing video online is here to stay. That wasn't true when Veoh launched. Back then, Shapiro says, major media companies were dismissive when he proposed partnerships under which Veoh would broadcast their content. “The initial response was quite hostile,” he says. “It was 'Absolutely not, we have no interest in a partnership ' oh, and by the way, we just may sue you.'” Content companies firmly believed consumers had no desire to abandon their big screen TVs. “They said, 'Nobody wants to watch online,'” Shapiro says.

But Veoh ultimately hosted content produced by Warner Bros. Entertainment Inc. and CBS Inc., among others. “By now,” Shapiro says, “everyone realizes that it's a tide, and you have to go with it. You need aggregators, a centralized place for consumers to find content. Veoh and YouTube and many other companies have created systems that democratize broadcasting.”

Michael Robertson, a friend of Shapiro's and a fellow tech entrepreneur who founded digital-music site mp3.com, has followed the Veoh litigation closely. He says the ruling in the case was unique. “Often, the record labels sue a start-up and then the company either runs out of money, or the investors compel them to settle. [There have] actually not been a lot of cases that have gone to a ruling from a judge using the DMCA as a defense.”

Robertson currently runs a company called mp3tunes.com that allows users to store their music online and access it from multiple devices. The company is currently defending itself against a copyright infringement suit brought by EMI Group Ltd. in New York's Southern District. EMI claims mp3tunes.com's online storage system violates copyright law. Robertson argues that all his company does is provide users with “an empty locker” to store files from their own computers. Robertson takes a position similar to Veoh's: that mp3tunes.com is immune from copyright liability under the DMCA.

Record Labels' Mindset

Big music companies clearly haven't changed their tune about copyright infringement suits. Witness also the Recording Industry Association of America's decision to go to trial a third time in Minnesota federal court with file-sharer Jammie Thomas-Rasset after the judge in the case cut a jury award against her from $1.92 million to $54,000.

“The mind-set of the record labels,” Robertson says, “is: 'If you touch copyrighted work in any fashion, it's a violation, because it's ours.'” The result of such an aggressive strategy? Fewer digital music start-ups, he says: “It's really slowed down the space, reduced competition, and reduced innovation.”

Compare that to what's going on in online video, where even before Judge Matz issued his decision, Veoh was cutting deals with big companies. Indeed, as the UMG v. Veoh suit wound its way through the courts, a real split appeared to be developing among the industries that fall under the umbrella often known as “big content.” While Viacom Inc.'s much-hyped suit against YouTube still looms, the entertainment conglomerate already had a deal in place to share content ' and split ad revenue ' with Veoh. It's another example of how, as companies that work with video figure out ways to work with online start-ups, large music labels ' and their aggressive lawyers ' seem to keep marching to the beat of their own drummer.

The nation's major record labels have never been shy about enforcing their copyrights in court. And over the last decade, music industry lawsuits targeting individual consumers accused of illegal file sharing stirred controversy and criticism in certain quarters. At the same time, efforts by these copyright holders to wring hefty settlements out of Silicon Valley tech start-ups via litigation ' or, in some cases, to snuff them out altogether ' has gotten less attention.

Universal Music Group (UMG), for example, has filed copyright suits against and won settlements from such Internet-based companies as iMeem, Multiply, Grouper Network (now Cackle), Bolt, mp3.com and MySpace. Facing statutory damages awards of up to $150,000 per infringed work, virtually all the defendants named in these suits chose to pay large settlements rather than take their chances in court. (MySpace reportedly agreed to a settlement of nearly $100 million to end a UMG suit in 2007.)

In most instances, the settlement money came from venture capital originally meant to build up the businesses. For some companies, the short-lived Bolt.com, for one, settlement was a financial disaster that helped pave the way for bankruptcy. Ten years after A&M Records Inc. v. Napster , 239 F.3d 1004 (9th Cir. 2001), it's hard to think of a suit in which an Internet company beat a big copyright holder. In fact, most such companies won't even fight.

Then there was Veoh Networks. Launched in 2004 just three months after YouTube.com debuted, the San Diego-based online video company hosted both user-generated material (like YouTube) and high-resolution, professionally produced content (think Hulu.com). When it was sued, without warning, for copyright infringement by UMG in 2007, Veoh fought back. The result: a slam-dunk ruling in its favor in September 2009 that, if upheld on appeal, would have a big impact on the way major labels negotiate with emerging media and technology companies.

Suit Prompts Veoh's Dooms

The basis of UMG's claim against Veoh was the same one it has made against other tech companies: Veoh was guilty of wide-scale infringement because it let users post videos that included unapproved UMG'owned music. Veoh argued that it was immune to such a copyright claim because it fully complied with the Digital Millennium Copyright Act (DMCA). The company maintained that it promptly responded to any DMCA take-down notices it received from copyright holders and terminated the accounts of users who repeatedly broke copyright rules.

Veoh CEO Dmitry Shapiro said recently that even though he believed the company was on solid legal ground, the suit, combined with the recession, was nearly fatal. As the case proceeded, Veoh cut its workforce from more than 100 employees to about two dozen “hard-core” staffers. Meanwhile, Shapiro said, several companies that had shown interest in acquiring Veoh backed off. [Editor's note: Veoh laid off the rest of its staff in February 2010 and announced that it was filing for bankruptcy liquidation. Shapiro stated on his Web site: "The distraction of the legal battles and the challenges of the broader macro-economic climate have led to our Chapter 7 bankruptcy."]

It wasn't just the direct cost of litigation that hurt. UMG's legal tactics wreaked havoc on Veoh's day-to-day operations, Shapiro says: “They came after us with a 'shock and awe' campaign.” The suit forced Veoh to design systems to ensure that no videos it hosted were deleted ' even videos whose creators wanted them deleted. “We were prevented from doing any of that, simply because Universal said we had to store it. When you've got 23 million users processing data, that's really tough. For two years, my IT guys were walking around, saying, 'They're going to choke us.'”

Unlike other companies that decided it made sense to settle, Veoh could afford to fight UMG because it had more than $70 million in venture capital at its disposal. With that in mind ' and aware that investors naturally try to avoid spending development funds on legal bills ' UMG even attempted to include the venture capitalists backing Veoh as defendants in the suit. Judge Howard Matz of federal district court in Los Angeles rejected that hardball tactic.

Matz ruled in Veoh's favor on summary judgment, saying the company had indeed followed the DMCA to the letter and that UMG's copyright claim couldn't stand. If users uploaded video with copyrighted material, Matz ruled, it was the copyright holder's responsibility to go after the actual user or to send a take-down notice asking Veoh to remove the offending content. Veoh, represented by Winston & Strawn, had a history of complying with those notices within a day or two, Matz wrote. UMG Recordings Inc. v. Veoh Networks Inc. , 665 F.Supp. 2d 1099 (C.D.Calif. 2009). UMG, represented by Irell & Manella, appealed the district court ruling to the U.S. Court of Appeals for the Ninth Circuit. [Editor's note: The future status of the appeal was unclear upon Veoh's bankruptcy filing.]

'The Copyright Wars'

At least for the moment, Matz's decision is among several developments that suggest a subtle shift in the ongoing IP disputes known collectively as the copyright wars. Most people now accept that the phenomenon of watching and sharing video online is here to stay. That wasn't true when Veoh launched. Back then, Shapiro says, major media companies were dismissive when he proposed partnerships under which Veoh would broadcast their content. “The initial response was quite hostile,” he says. “It was 'Absolutely not, we have no interest in a partnership ' oh, and by the way, we just may sue you.'” Content companies firmly believed consumers had no desire to abandon their big screen TVs. “They said, 'Nobody wants to watch online,'” Shapiro says.

But Veoh ultimately hosted content produced by Warner Bros. Entertainment Inc. and CBS Inc., among others. “By now,” Shapiro says, “everyone realizes that it's a tide, and you have to go with it. You need aggregators, a centralized place for consumers to find content. Veoh and YouTube and many other companies have created systems that democratize broadcasting.”

Michael Robertson, a friend of Shapiro's and a fellow tech entrepreneur who founded digital-music site mp3.com, has followed the Veoh litigation closely. He says the ruling in the case was unique. “Often, the record labels sue a start-up and then the company either runs out of money, or the investors compel them to settle. [There have] actually not been a lot of cases that have gone to a ruling from a judge using the DMCA as a defense.”

Robertson currently runs a company called mp3tunes.com that allows users to store their music online and access it from multiple devices. The company is currently defending itself against a copyright infringement suit brought by EMI Group Ltd. in New York's Southern District. EMI claims mp3tunes.com's online storage system violates copyright law. Robertson argues that all his company does is provide users with “an empty locker” to store files from their own computers. Robertson takes a position similar to Veoh's: that mp3tunes.com is immune from copyright liability under the DMCA.

Record Labels' Mindset

Big music companies clearly haven't changed their tune about copyright infringement suits. Witness also the Recording Industry Association of America's decision to go to trial a third time in Minnesota federal court with file-sharer Jammie Thomas-Rasset after the judge in the case cut a jury award against her from $1.92 million to $54,000.

“The mind-set of the record labels,” Robertson says, “is: 'If you touch copyrighted work in any fashion, it's a violation, because it's ours.'” The result of such an aggressive strategy? Fewer digital music start-ups, he says: “It's really slowed down the space, reduced competition, and reduced innovation.”

Compare that to what's going on in online video, where even before Judge Matz issued his decision, Veoh was cutting deals with big companies. Indeed, as the UMG v. Veoh suit wound its way through the courts, a real split appeared to be developing among the industries that fall under the umbrella often known as “big content.” While Viacom Inc.'s much-hyped suit against YouTube still looms, the entertainment conglomerate already had a deal in place to share content ' and split ad revenue ' with Veoh. It's another example of how, as companies that work with video figure out ways to work with online start-ups, large music labels ' and their aggressive lawyers ' seem to keep marching to the beat of their own drummer.