IP Law Daily, COPYRIGHT—S.D.N.Y.: Verdict against MP3tunes founder stands in most respects, but $7.5 million punitive damage award remitted to $750,000, (Sep 30, 2014)

By Thomas Long, J.D.

A jury verdict finding Michael Robertson, the founder and principal of defunct music locker storage service MP3tunes, secondarily liable for infringing the copyrights of record companies and music publishers has been allowed to stand in most respects by the federal district court in New York City (Capitol Records, Inc. v. MP3tunes, LLC, September 29, 2014, Pauley, W.). Robertson was entitled to judgment as a matter of law with respect to the plaintiffs’ claims of liability regarding the public display of album cover art and some of the plaintiffs’ claims of infringement under “red flag” knowledge and willful blindness theories. In addition, Robertson was entitled to a new trial on punitive damages, unless the plaintiffs elected to remit the jury’s $7.5 million punitive damages award to $750,000.

The court noted the complexity of the dispute and suggested that the parties’ litigation strategies were at the root of its decision to reject part of the jury’s verdict. According to the court, the jury’s task in deciding the case was “beyond all reasonable scale.”

“While Robertson's business practices sometimes infringed copyrights, many of the Plaintiffs' claims were just too big to succeed,” the court said. “Plaintiffs' evidence on their most significant theories of liability—red flag knowledge and willful blindness-was sparse.” In addition, Robertson’s seemingly untrustworthy demeanor caused the jury to base parts of its verdict on “something other than the evidence,” in the court’s view.

MP3tunes’ Business Model

MP3tunes allowed users to store music files in personal online storage “lockers.” Songs uploaded to a user’s locker could be played and downloaded through any Internet-enabled device. MP3tunes also operated Sideload.com, a website that allowed users to search for free song files on the Internet. Sideloading was similar to downloading, except that the file was not saved to the user’s computer; rather, it was stored in the user’s MP3tunes locker and the Sideload site. A sideloaded file was available to anyone who visited Sideload.

Jury Trial

The plaintiffs filed suit against MP3tunes and Robertson, alleging that they made infringing copies of songs and cover art available to MP3tunes users. After a 12-day trial, the jury found MP3tunes directly liable for infringement of the plaintiffs’ reproduction and public display rights in cover art and for unfair competition with respect to pre-1972 sound recordings.

The jury concluded that MP3tunes acted with both “red flag” knowledge and willful blindness, making the service provider ineligible for protection under the safe harbor provided by the Digital Millennium Copyright Act (DMCA). MP3tunes was found secondarily liable for infringements by its users, third-party websites, and MP3tunes executives. The jury did not, however, find MP3tunes secondarily liable for violating the plaintiffs’ distribution rights. Although the jury did not find Robertson secondarily liable for MP3tunes’ failure to remove certain works from lockers in response to DMCA takedown notices, Robertson was found secondarily liable for every other claim for which MP3tunes was liable.

During the damages phase, the jury found that MP3tunes and Robertson acted willfully as to all infringing acts, except for MP3tunes’ failure to remove works from lockers. The jury awarded the plaintiffs $48,061,073 in damages.

Robertson moved for judgment as a matter of law, or alternatively a new trial, and for remittitur.

Vicarious Liability

To find Robertson vicariously liable for MP3tunes' copyright infringement, the jury was required to find that (1) Robertson had the right and ability to supervise the infringing activity of MP3tunes and (2) Robertson received a financial benefit directly attributable to the infringing activity. According to Robertson, there was insufficient evidence regarding the second prong, direct financial benefit.

The court disagreed. A direct financial benefit existed when there was a causal relationship between the infringing activity and an obvious and direct financial interest. In the short term, infringing content drew users to MP3tunes, expanded its user base, and allowed Robertson to sell additional locker subscriptions. In the long term, Robertson planned to leverage that draw into a business that rivaled iTunes. It did not matter whether MP3tunes or Robertson actually realized a profit, the court said. The point of the infringement was to grow the business and its user base. Robertson’s motion for judgment as a matter of law on this claim was denied.

Contributory Liability

To find Robertson contributorily liable, the jury was required to find that Robertson (1) had knowledge of the infringing activity and (2) induced, caused, or materially contributed to the infringing conduct of another. In the court’s view, the plaintiffs proved Robertson's constructive knowledge through evidence of Robertson 's control over MP3tunes, knowledge that the major labels were not distributing works in MP3 format, encouragement of employees to sideload, awareness of DMCA takedown notices, and formulation of a company policy to ignore complaints of copyright infringement absent a formal DMCA notice. Robertson contributed to the users' infringement by funding the site and facilities for the infringing activity, directing MP3tunes ' development and setting relevant policies at the company, and creating, developing, and marketing Sideload.

“Tertiary” Liability

Robertson argued that there was no basis for “tertiary” liability—that is, finding him secondarily liable for MP3tunes’ secondary liability. The court disagreed that such a claim was not legally cognizable.

DMCA Safe Harbor

The crux of the case was whether MP3tunes and Robertson were insulated from infringement liability under the DMCA, the court said. The safe harbor provided to online service providers by DMCA Sec. 512(c) was not available if the provider was aware of facts or circumstances from which infringing activity was apparent. This is known as “red flag” knowledge. In addition, safe harbor protection was unavailable if the provider acted with “willful blindness” in regard to infringing activity.

The jury found red flag knowledge and willful blindness as to four categories of works: (1) takedown notices identifying ten or more infringing files on a domain; (2) Sideloads of MP3s before January 2007; (3) Sideloads by MP3tunes executives; and (4) works by The Beatles.

Takedown notices identifying ten or more infringing files on a domain. The plaintiffs sent MP3tunes takedown notices identifying thousands of songs and the source URLs from which they were sideloaded. Thirteen domains were listed at least ten times. According to the plaintiffs, MP3tunes and Robertson knew that those domains likely hosted other infringing content.

This evidence was not enough to establish red flag knowledge or willful blindness, the court determined. Red flag knowledge required awareness of facts that would have made specific instances of infringement objectively obvious to a reasonable person. General knowledge was not sufficient. Knowledge that a high percentage of content on a domain was infringing did not amount to actual or red flag knowledge of particular instances of infringement. Imputing knowledge to MP3tunes would impose an obligation to affirmatively monitor content, which would contravene the DMCA’s clear instruction that no such obligation existed. Therefore, Robertson’s motion for judgment as a matter of law was granted as to his liability for secondary infringement of content sideloaded by users from these domains.

Sideloads before January 2007. The major record labels did not offer MP3s for sale until 2007. Robertson was aware of this fact. The plaintiffs argued that MP3tunes must have known that all pre-2007 sideloads of major-label MP3s were infringing. The jury agreed.

Knowledge that a high percentage of a type of content was infringing was insufficient to create red flag knowledge, the court said. The jury did have evidence that MP3tunes consciously avoided confirming the fact that the sideloaded content was infringing, which would constitute willful blindness under the common law. However, in the context of the DMCA, willful blindness was limited by the express statutory disavowal of a duty to affirmatively monitor. Therefore, MP3tunes could not be held liable for failing to routinely search its servers for major-label MP3s created before January 2007. As a result, Robertson’s motion for judgment as a matter of law was granted with regard to these sideloads.

Sideloads by MP3tunes executives. Robertson’s motion for judgment as a matter of law was denied as to tracks sideloaded by MP3tunes executives. As the executives sideloaded tracks, they viewed the source domain’s URL. They knew that certain sites had a high probability of hosting infringing material.

The Beatles. MP3tunes users sideloaded numerous tracks by The Beatles. Robertson acknowledged as early as 2009 that The Beatles had never authorized their songs to be available in any digital format. However, general knowledge that sideloaded Beatles songs would be infringing did not establish knowledge of specific acts of infringement.

Although the executives did have actual knowledge with regard to Beatles songs that they personally sideloaded, there was insufficient evidence that they had knowledge that users had sideloaded specific Beatles tracks, with one exception, the court said. In addition, a user sent MP3tunes an email indicating that the song “Strawberry Fields Forever” was available on Sideload, which gave the executives red flag knowledge that infringing copies of the song had been sideloaded. Therefore, Robertson’s judgment as a matter of law was granted with regard to all Beatles tracks except for “Strawberry Fields Forever.”

Public Performance Claims

The jury found MP3tunes and Robertson vicariously and contributorily liable for third-party websites’ violations of the plaintiffs’ public performance rights. Those findings were based on evidence that Sideload allowed users to play tracks hosted by third-party websites through the user’s browser. The court allowed the findings to stand because there was ample evidence that third-party websites were performing the plaintiffs’ works publicly.

Reproduction of Cover Art

The jury found that MP3tunes was liable for direct infringement of the plaintiffs’ reproduction rights in album cover art. Robertson had designed MP3tunes’ software to retrieve cover art from Amazon.com whenever a user uploaded music files to a locker. The art was uploaded to the user’s locker and displayed when a song from that album was played. Recording label plaintiffs discovered more than 300 of their own cover art images in the MP3tunes database.

In the court’s view, it was reasonable for the jury to conclude that MP3tunes’ volitional conduct caused the unauthorized reproduction of the cover art. The evidence at trial demonstrated that MP3tunes created this feature at Robertson’s direction. Therefore, the court denied Robertson’s motion for judgment as a matter of law with respect to MP3tunes’ direct liability for reproduction of cover art.

Public Display of Cover Art

The court agreed with Robertson’s contention that MP3tunes did not publicly transmit cover art because MP3tunes created a separate copy of each album cover for each user. Only one user was capable of receiving each copy. Because there was no master copy of the cover art, MP3tunes could not be held liable for a public display of the art.

Statutory Damages for Multiple Songs and Cover Art

The plaintiffs were entitled to only one statutory damages award for any single infringed “work,” the court noted. Songs that were sold only as part of an album could not be treated separately because materials that were sold only as part of a compilation were not considered separate works for purposes of statutory damages. The plaintiffs had the burden to show that a particular song was available for purchase as a single and was therefore subject to a separate statutory damages award. The plaintiffs failed to provide specific evidence as to whether each song in suit was available as a single; they offered only generalized testimony from record company executives. However, it was reasonable for the jury to conclude that the plaintiffs had shown by a preponderance of the evidence that any track not by The Beatles or Bob Seger, or one track by Pink Floyd, was marketed as a single at the time of infringement.

With regard to cover art, there was no evidence that specific pieces of art were available for purchase separately, independent of the purchase of a sound recording. Therefore, recovery was available only for cover art for which the plaintiffs had not already recovered on a sound recording, the court decided.

Unfair Competition

The Copyright Act applied only to post-1972 sound recordings. The plaintiffs asserted unfair competition claims and common law copyright claims with regard to pre-1972 recordings in suit. According to the court, the evidence showed that “rampant” sharing of unauthorized files had damaged the plaintiffs, that MP3tunes executives sideloaded thousands of songs, and that MP3tunes misled users into thinking they had no legal liability for sideloading songs. Therefore, it was reasonable for the jury to conclude that MP3tunes engaged in unfair competition. In addition, the evidence showed that Robertson controlled MP3tunes, encouraged its executives to sideload, and deceived the public.

Remittitur

Robertson contended that the jury’s statutory damages award was excessive because neither he nor MPtunes were willful infringers. The court disagreed, stating that the jury’s finding of willfulness was amply supported.

Robertson also argued that the plaintiffs’ lost revenue was miniscule compared to the damages awarded by the jury, that no deterrent was required, that he cooperated with the plaintiffs during the litigation, and that the conduct and attitude of the parties did not warrant a large award. However, in the court’s view, there was a strong need to discourage Robertson and others from engaging in similar infringement. Robertson’s motion for remittitur of the statutory damages was denied.

Punitive Damages

Punitive damages were available only for common law claims pertaining to pre-1972 works. The jury awarded $7.5 million in punitive damages. This award was excessive and violated due process, the court held.

Robertson’s conduct was “reprehensible” and deserved to be punished, the court said. Robertson intentionally misled users into believing their actions did not violate copyright law. He facilitated the infringement of numerous works and contributed to “an era of rampant digital piracy.”

However, to comport with due process, punitive damages must bear a reasonable relationship to compensatory damages. In this case, the plaintiffs elected not to offer proof of actual harm. Instead, they sought nominal damages of $1 per work against those who facilitated infringement rather than actual damages against the individual users.

Under New York law, unauthorized use of copyrighted material subjected a defendant to civil penalties—compensatory and punitive damages—and criminal penalties—fines and terms of imprisonment. The statutory damages available under the Copyright Act could provide a matrix of civil penalties comparable to the criminal penalties provided for by New York law.

The jury assessed nominal damages in the amount of $323 ($1 per work) and punitive damages of $7.5 million. If the punitive award were divided among all of the works for which the jury found liability, it would amount to roughly $23,220 per work. However, the court’s rulings on willful blindness and red flag knowledge had the effect of reducing the nominal damages from $323 to $40.

Accordingly, the court decided that a punitive damages award of $750,000 comported with due process and was not grossly excessive. If the plaintiffs elected not to accept that amount, the court stated that it would hold a new trial on punitive damages.

The case is No. 1:07-cv-09931-WHP-FM.

Attorneys: Andrew Harrison Bart (Jenner & Block LLP) for Capitol Records, Inc., Caroline Records, Inc., EMI Christian Music Group, Inc., Priority Records LLC, and Virgin Records America, Inc. Ira Stephen Sacks (Akerman LLP) for Michael Robertson.

Companies: Capitol Records, Inc.; Caroline Records, Inc.; EMI Christian Music Group, Inc.; Priority Records LLC; Virgin Records America, Inc.; MP3tunes, LLC

Cases: Copyright TechnologyInternet NewYorkNews