Fourth Circuit to Weigh ISP Copyright Liability for Peer-to-Peer File Sharing by Subscribers

As its first line of defense, Cox asserted that its actions were protected by section 512(i) of the DMCA — a “safe harbor” provision which shields service providers from secondary copyright infringement damages, so long as the service provider “reasonably implement[s]” a policy that provides for the termination of “ repeat infringers” in “appropriate circumstances.” Cox also argued that under controlling Supreme Court authority, it could not be held secondarily liable for the acts of its subscribers.

As is typical with the Eastern District of Virginia's “rocket docket,” the case proceeded quickly through discovery. In September 2016, BMG and Cox filed cross motions for summary judgment. Cox asserted that it had reasonably implemented a repeat infringer policy, and thus was protected by the DMCA safe harbor. BMG argued that Cox's repeat infringer policy did not meet the standards to claim DMCA safe harbor protection.

In a decision on Nov. 19, 2015, issued less than a year from the filing of the action, Judge Liam O'Grady sided with BMG and held that Cox did not qualify for the DMCA safe harbor. In doing so, he found that “before the fall of 2012 Cox did not implement its repeat infringer policy. Instead, Cox publicly purported to comply with its policy, while privately disparaging and intentionally circumventing the DMCA's requirements.”

It was undisputed that Cox had a written policy, which prohibited subscribers from using Cox's network to infringe others' intellectual property and warned that violations could result in the “immediate suspension or termination of either … access to the service and or [the] Cox account.” In practice, however, Cox seldom terminated subscribers. After receiving a notice of a claim of infringement, Cox would place a “strike” on the subscriber's account and, for every notice but the first, would forward the notice to the subscriber. No further action would be taken until the eighth and ninth notices, when the account holder would be directed to a page warning against further infringement. After the 10th, 11th, 12th, and 13th notices, the account holder would be shown an additional warning and was required to contact customer support to get back online. After 14 “strikes” within a six month period, Cox would consider terminating the subscriber's account.

Judge O'Grady also noted that a series of emails from Cox employees suggested that Cox was intentionally circumventing the DMCA requirements. The emails demonstrated that “Cox employees followed an unwritten policy put in place by senior members of Cox's abuse group by which accounts used to repeatedly infringe copyrights would be nominally terminated, only to be reactivated upon request. Once these accounts were reactivated, customers were given clean slates, meaning the next notice of infringement Cox received linked to those accounts would be considered the first in Cox's graduate response procedure.”

The jury trial commenced in early December 2015 and resulted in a verdict in favor of BMG. The jury found that Cox's subscribers had used its service to infringe copyrighted works, and while Cox was not liable under a theory of vicarious liability, it was liable under a theory of contributory infringement for the acts of its subscribers. The jury awarded $25 million in statutory damages.

Afterwards, Cox sought judgment as a matter of law that it could not be held contributorily liable because its Internet service is capable of substantial non-infringing uses. In turn, BMG moved for judgment as a matter of law on its vicarious infringement claim.

In a decision on Aug. 8, 2016, Judge O'Grady denied both motions. With respect to the vicarious infringement claim, which requires that a party have “an obvious and direct financial interest” in the infringing activity, the court noted that substantial evidence supported the jury's finding that Cox had no such financial interest in its subscribers' infringement of copyrights. The court likewise upheld the jury's contributory infringement verdict, reasoning that because Cox had general knowledge of the infringement on its network, and because Cox materially contributed to the infringement by turning a “blind eye” to the acts of its subscribers, sufficient evidence existed for a reasonable jury to find Cox contributorily liable for infringement of BMG's copyrights.

The Issues on Appeal

Cox's appeal raises two key issues that could have wide-ranging impact on the potential liability of ISPs: 1) what kind of repeat infringer policy must an ISP implement in order to qualify for the DMCA safe harbor; and 2) when can an ISP be held contributorily liable for its subscribers' conduct?

Application of the DMCA Safe Harbor

The DMCA's safe harbor shields service providers from damages for secondary copyright infringement, so long as they “reasonably implement” a policy that provides for the termination of “repeat infringers” in “appropriate circumstances.” The DMCA doesn't, however, define any of those terms.

Judge O'Grady held that “repeat infringer” includes subscribers “against whom an unadjudicated charge has been made, but the service provider has actual knowledge of, or is aware of facts and circumstances suggesting, infringement.” And, with respect to the “appropriate circumstances” in which a subscriber's account should be terminated, Judge O'Grady held that, at minimum, a subscriber's account should be terminated when a service provider “is given sufficient evidence to create actual knowledge of blatant, repeat infringement by particular users, particularly infringement of a willful and commercial nature.”

On appeal, Cox has argued that a subscriber cannot be a “repeat infringer” unless that subscriber has been “adjudicated” and found liable for infringement. In support, Cox points to the plain text of Section 512 of the Copyright Act. While other Copyright Act provisions use terms like “alleged infringement” or “claimed infringement,” thereby indicating that allegations are the relevant factor, the “repeat infringer” provision does not mention allegations at all, suggesting that something more than allegations is required. Indeed, Cox points out that receiving a notice of a claim of infringement does not necessarily mean that infringement has occurred. Systems used to monitor infringement may misidentify files and, even when a subscriber has transmitted copyrighted material, the alleged infringer may have a fair use defense. For this reason, Cox has argued that infringement notices do not give rise to the “actual knowledge of blatant, repeat infringement,” for which Judge O'Grady held that a subscriber's account must be terminated. Rather, Cox takes the positon that it cannot be the judge of who is actually an infringer; that decision needs to be made by a court.

Cox further takes the position that Judge O'Grady was wrong to hold as a matter of law that Cox failed to “reasonably implement” a policy terminating subscribers in “appropriate circumstances.” Reasonableness, after all, is “a quintessential jury question.” Moreover, Cox argues that it may not be appropriate to terminate a subscriber's Internet access — “which is critical to functioning in our modern world” — based solely on third-party allegations.

In response, BMG argues that interpreting “repeat infringer” as “adjudicated repeat infringer” would be both contrary to the term's ordinary meaning and practically unworkable. “Sanctioning infringers through termination,” BMG notes, “would be superfluous if it applied only to repeat infringers already found liable in a court of law.” And “giving every service provider a DMCA safe harbor from secondary liability unless it fail[s] to terminate adjudicated infringers” would effectively “eliminate secondary liability as an alternative to suits against individual subscribers.” Moreover, BMG argues that it was appropriate to find as a matter of law that Cox failed to reasonably implement a repeat infringer policy, particularly given the “unwritten policy” of immediately reactivating any terminated accounts.

Contributory Liability for Acts of Subscribers

Generally, the distributor of a product cannot be held liable for users' infringement so long as the product has “substantial non-infringing uses.” This rule was established in the “Betamax case,” Sony Corporation of America v. Universal City Studios, Inc., 464 U.S. 417 (1987), when the Supreme Court held that Sony was not secondarily liable for customers' use of Betamax video recorders to “time shift” television programs, because the recorders were also capable of “substantial non-infringing uses.” In Metro–Goldwyn–Mayer Studios, Inc. v. Grokster, Ltd., 545 U.S. 913 (2005), the Supreme Court slightly cabined the Sony holding, finding that while the peer-to-peer file sharing network at issue did have substantial non-infringing uses, secondary liability was nonetheless available because the defendants had intentionally induced or encouraged the direct copyright infringement.

In his decision, Judge O'Grady took a narrow view of the post-Grokster state of the law and the Sony decision in particular. Rather than reading Sony as a broad bar to secondary liability when a product has substantial non-infringing uses, Judge O'Grady limited the holding to situations in which there is no ongoing relationship between the direct infringer and the contributory infringer at the time the alleged infringement occurred. Sony's only contact with purchasers was at the point of sale of the accused video recorders. Cox, on the other hand, maintains an ongoing relationship with its subscribers. To Judge O'Grady, this fact took the case out of the realm of Sony and permitted a contributory infringement claim.

Moreover, Judge O'Grady rejected Cox's argument that, after Grokster, the only way to establish secondary liability in a substantial non-infringing use scenario is to demonstrate intentional inducement or encouragement of direct copyright infringement. While acknowledging that this reading of Sony and Grokster “would greatly simplify this area of the law,” he nonetheless held that it “cuts contributory liability too drastically and is beyond the Supreme Court's instruction.” Instead, Judge O'Grady held that contributory infringement is available if a company has knowledge that subscribers are using its service to repeatedly infringe copyrights and it takes no action to stop the infringing activity. For Cox, this knowledge was established through evidence of “willful blindness”

On appeal, Cox again has argued that it cannot be held liable for contributory infringement: 1) because its Internet services are capable of substantial non-infringing uses, thereby immunizing Cox from liability for contributory infringement under Sony; 2) because BMG failed to demonstrate that Cox took active steps to induce infringement as required to establish contributory liability under Grokster; and 3) because, at minimum, contributory liability based on an ISP's knowledge of infringement must involve actual knowledge of specific instances of infringement, not the constructive knowledge or willful blindness relied on by Judge O'Grady.

In response, BMG argues in favor of Judge O'Grady's interpretation of the Sony/Grokster case law and notes the public policy implications of a broader bar to liability. As the Copyright Alliance argues in an amicus brief supporting BMG's position: “If Cox's view was the law, then as long as it was not actively inducing or promoting infringement, Cox could throw each and every infringement notice it received straight into the trash, and the 'Abuse Group' charged with addressing online piracy could knowingly permit active infringement without creating any risk of liability to Cox.”

Conclusion

The Fourth Circuit's decision in this case could have wide-ranging implications for the business operations of a whole host of service providers who rely on the DMCA safe harbors and the limits of secondary copyright infringement to avoid the potential of crippling damage awards if held liable for the acts of their subscribers. The Fourth Circuit will be called upon to weigh the competing interests of those companies who need these protections to continue with their day-to-day operations and those copyright owners beset by widespread online infringement of their intellectual property rights.

*****
J. Alexander Lawrence is a partner and Abigail L Colella is an associate in Morrison and Foerster LLP's New York office.

The Fourth Circuit Court of Appeals is gearing up to hear argument in BMG Rights Management v. Cox Communications, one of the first attempts by the music industry to hold an Internet Service Provider (ISP) liable for unauthorized peer-to-peer file sharing by its subscribers. The Fourth Circuit will be asked to decide two crucial questions of copyright law: 1) what kind of repeat infringer policy must a service provider implement to qualify for the safe harbor under the Digital Millennium Copyright Act (DMCA); and 2) can an ISP be held contributorily liable for its subscribers' actions, notwithstanding that its service — providing access to the Internet — is capable of substantial non-infringing uses.

The District Court Action Against Cox

On Nov. 26, 2014, BMG and Round Hill Music launched the dispute by filing a complaint against Cox in the United States District Court for the Eastern District of Virginia. The plaintiffs claimed that thousands of Cox subscribers had used Cox's network to illegally download copyrighted works via peer-to-peer file sharing programs, and argued that Cox should be held vicariously or contributorily liable for their infringement.

As its first line of defense, Cox asserted that its actions were protected by section 512(i) of the DMCA — a “safe harbor” provision which shields service providers from secondary copyright infringement damages, so long as the service provider “reasonably implement[s]” a policy that provides for the termination of “ repeat infringers” in “appropriate circumstances.” Cox also argued that under controlling Supreme Court authority, it could not be held secondarily liable for the acts of its subscribers.

As is typical with the Eastern District of Virginia's “rocket docket,” the case proceeded quickly through discovery. In September 2016, BMG and Cox filed cross motions for summary judgment. Cox asserted that it had reasonably implemented a repeat infringer policy, and thus was protected by the DMCA safe harbor. BMG argued that Cox's repeat infringer policy did not meet the standards to claim DMCA safe harbor protection.

In a decision on Nov. 19, 2015, issued less than a year from the filing of the action, Judge Liam O'Grady sided with BMG and held that Cox did not qualify for the DMCA safe harbor. In doing so, he found that “before the fall of 2012 Cox did not implement its repeat infringer policy. Instead, Cox publicly purported to comply with its policy, while privately disparaging and intentionally circumventing the DMCA's requirements.”

It was undisputed that Cox had a written policy, which prohibited subscribers from using Cox's network to infringe others' intellectual property and warned that violations could result in the “immediate suspension or termination of either … access to the service and or [the] Cox account.” In practice, however, Cox seldom terminated subscribers. After receiving a notice of a claim of infringement, Cox would place a “strike” on the subscriber's account and, for every notice but the first, would forward the notice to the subscriber. No further action would be taken until the eighth and ninth notices, when the account holder would be directed to a page warning against further infringement. After the 10th, 11th, 12th, and 13th notices, the account holder would be shown an additional warning and was required to contact customer support to get back online. After 14 “strikes” within a six month period, Cox would consider terminating the subscriber's account.

Judge O'Grady also noted that a series of emails from Cox employees suggested that Cox was intentionally circumventing the DMCA requirements. The emails demonstrated that “Cox employees followed an unwritten policy put in place by senior members of Cox's abuse group by which accounts used to repeatedly infringe copyrights would be nominally terminated, only to be reactivated upon request. Once these accounts were reactivated, customers were given clean slates, meaning the next notice of infringement Cox received linked to those accounts would be considered the first in Cox's graduate response procedure.”

The jury trial commenced in early December 2015 and resulted in a verdict in favor of BMG. The jury found that Cox's subscribers had used its service to infringe copyrighted works, and while Cox was not liable under a theory of vicarious liability, it was liable under a theory of contributory infringement for the acts of its subscribers. The jury awarded $25 million in statutory damages.

Afterwards, Cox sought judgment as a matter of law that it could not be held contributorily liable because its Internet service is capable of substantial non-infringing uses. In turn, BMG moved for judgment as a matter of law on its vicarious infringement claim.

In a decision on Aug. 8, 2016, Judge O'Grady denied both motions. With respect to the vicarious infringement claim, which requires that a party have “an obvious and direct financial interest” in the infringing activity, the court noted that substantial evidence supported the jury's finding that Cox had no such financial interest in its subscribers' infringement of copyrights. The court likewise upheld the jury's contributory infringement verdict, reasoning that because Cox had general knowledge of the infringement on its network, and because Cox materially contributed to the infringement by turning a “blind eye” to the acts of its subscribers, sufficient evidence existed for a reasonable jury to find Cox contributorily liable for infringement of BMG's copyrights.

The Issues on Appeal

Cox's appeal raises two key issues that could have wide-ranging impact on the potential liability of ISPs: 1) what kind of repeat infringer policy must an ISP implement in order to qualify for the DMCA safe harbor; and 2) when can an ISP be held contributorily liable for its subscribers' conduct?

Application of the DMCA Safe Harbor

The DMCA's safe harbor shields service providers from damages for secondary copyright infringement, so long as they “reasonably implement” a policy that provides for the termination of “repeat infringers” in “appropriate circumstances.” The DMCA doesn't, however, define any of those terms.

Judge O'Grady held that “repeat infringer” includes subscribers “against whom an unadjudicated charge has been made, but the service provider has actual knowledge of, or is aware of facts and circumstances suggesting, infringement.” And, with respect to the “appropriate circumstances” in which a subscriber's account should be terminated, Judge O'Grady held that, at minimum, a subscriber's account should be terminated when a service provider “is given sufficient evidence to create actual knowledge of blatant, repeat infringement by particular users, particularly infringement of a willful and commercial nature.”

On appeal, Cox has argued that a subscriber cannot be a “repeat infringer” unless that subscriber has been “adjudicated” and found liable for infringement. In support, Cox points to the plain text of Section 512 of the Copyright Act. While other Copyright Act provisions use terms like “alleged infringement” or “claimed infringement,” thereby indicating that allegations are the relevant factor, the “repeat infringer” provision does not mention allegations at all, suggesting that something more than allegations is required. Indeed, Cox points out that receiving a notice of a claim of infringement does not necessarily mean that infringement has occurred. Systems used to monitor infringement may misidentify files and, even when a subscriber has transmitted copyrighted material, the alleged infringer may have a fair use defense. For this reason, Cox has argued that infringement notices do not give rise to the “actual knowledge of blatant, repeat infringement,” for which Judge O'Grady held that a subscriber's account must be terminated. Rather, Cox takes the positon that it cannot be the judge of who is actually an infringer; that decision needs to be made by a court.

Cox further takes the position that Judge O'Grady was wrong to hold as a matter of law that Cox failed to “reasonably implement” a policy terminating subscribers in “appropriate circumstances.” Reasonableness, after all, is “a quintessential jury question.” Moreover, Cox argues that it may not be appropriate to terminate a subscriber's Internet access — “which is critical to functioning in our modern world” — based solely on third-party allegations.

In response, BMG argues that interpreting “repeat infringer” as “adjudicated repeat infringer” would be both contrary to the term's ordinary meaning and practically unworkable. “Sanctioning infringers through termination,” BMG notes, “would be superfluous if it applied only to repeat infringers already found liable in a court of law.” And “giving every service provider a DMCA safe harbor from secondary liability unless it fail[s] to terminate adjudicated infringers” would effectively “eliminate secondary liability as an alternative to suits against individual subscribers.” Moreover, BMG argues that it was appropriate to find as a matter of law that Cox failed to reasonably implement a repeat infringer policy, particularly given the “unwritten policy” of immediately reactivating any terminated accounts.

Contributory Liability for Acts of Subscribers

Generally, the distributor of a product cannot be held liable for users' infringement so long as the product has “substantial non-infringing uses.” This rule was established in the “Betamax case,” Sony Corporation of America v. Universal City Studios, Inc. , 464 U.S. 417 (1987), when the Supreme Court held that Sony was not secondarily liable for customers' use of Betamax video recorders to “time shift” television programs, because the recorders were also capable of “substantial non-infringing uses.” In Metro–Goldwyn–Mayer Studios, Inc. v. Grokster, Ltd. , 545 U.S. 913 (2005), the Supreme Court slightly cabined the Sony holding, finding that while the peer-to-peer file sharing network at issue did have substantial non-infringing uses, secondary liability was nonetheless available because the defendants had intentionally induced or encouraged the direct copyright infringement.

In his decision, Judge O'Grady took a narrow view of the post-Grokster state of the law and the Sony decision in particular. Rather than reading Sony as a broad bar to secondary liability when a product has substantial non-infringing uses, Judge O'Grady limited the holding to situations in which there is no ongoing relationship between the direct infringer and the contributory infringer at the time the alleged infringement occurred. Sony's only contact with purchasers was at the point of sale of the accused video recorders. Cox, on the other hand, maintains an ongoing relationship with its subscribers. To Judge O'Grady, this fact took the case out of the realm of Sony and permitted a contributory infringement claim.

Moreover, Judge O'Grady rejected Cox's argument that, after Grokster, the only way to establish secondary liability in a substantial non-infringing use scenario is to demonstrate intentional inducement or encouragement of direct copyright infringement. While acknowledging that this reading of Sony and Grokster “would greatly simplify this area of the law,” he nonetheless held that it “cuts contributory liability too drastically and is beyond the Supreme Court's instruction.” Instead, Judge O'Grady held that contributory infringement is available if a company has knowledge that subscribers are using its service to repeatedly infringe copyrights and it takes no action to stop the infringing activity. For Cox, this knowledge was established through evidence of “willful blindness”

On appeal, Cox again has argued that it cannot be held liable for contributory infringement: 1) because its Internet services are capable of substantial non-infringing uses, thereby immunizing Cox from liability for contributory infringement under Sony; 2) because BMG failed to demonstrate that Cox took active steps to induce infringement as required to establish contributory liability under Grokster; and 3) because, at minimum, contributory liability based on an ISP's knowledge of infringement must involve actual knowledge of specific instances of infringement, not the constructive knowledge or willful blindness relied on by Judge O'Grady.

In response, BMG argues in favor of Judge O'Grady's interpretation of the Sony/Grokster case law and notes the public policy implications of a broader bar to liability. As the Copyright Alliance argues in an amicus brief supporting BMG's position: “If Cox's view was the law, then as long as it was not actively inducing or promoting infringement, Cox could throw each and every infringement notice it received straight into the trash, and the 'Abuse Group' charged with addressing online piracy could knowingly permit active infringement without creating any risk of liability to Cox.”

Conclusion

The Fourth Circuit's decision in this case could have wide-ranging implications for the business operations of a whole host of service providers who rely on the DMCA safe harbors and the limits of secondary copyright infringement to avoid the potential of crippling damage awards if held liable for the acts of their subscribers. The Fourth Circuit will be called upon to weigh the competing interests of those companies who need these protections to continue with their day-to-day operations and those copyright owners beset by widespread online infringement of their intellectual property rights.

*****
J. Alexander Lawrence is a partner and Abigail L Colella is an associate in Morrison and Foerster LLP's New York office.