May 15, 2010 / 9:20 AM / in 8 years

Ruling could have chilling effect on P2P services

LOS ANGELES/DENVER (Billboard) - A May 12 federal court ruling finding LimeWire and its founder/chairman, Mark Gorton, liable for copyright infringement is the latest in a string of high-profile legal victories against companies and individuals who facilitate peer-to-peer (P2P) file sharing. But its practical importance in squelching illegal downloading is much murkier.

New York-based LimeWire claims to be “the world’s most popular peer-to-peer file sharing program,” and, if the major labels succeed in obtaining an injunction to disable the service, millions of users will see their spigot of free songs suddenly shut off.

But the labels won’t be able to prevent users from quickly moving to other networks and software providers. To this day, the Pirate Bay, which has been found guilty by a Swedish court of facilitating infringement, encourages its visitors to “download music, movies, games, software and much more.”

Still, key elements of U.S. District Court Judge Kimba Wood’s ruling, which follows large jury awards that the labels won in 2009 against file-sharers Jammie Thomas-Rasset and Joel Tenenbaum, have potentially important implications for the recording industry’s fight against online piracy.

PERSONAL LIABILITY

First, the judge found Gorton, who is also LimeWire’s sole director, personally liable for infringement, observing in her ruling that “an individual, including a corporate officer, who has the ability to supervise infringing activity and has a financial interest in that activity, or who personally participates in that activity is personally liable for infringement.”

That will likely strike fear in the hearts of would-be P2P moguls who may have been clinging to the belief that they could hide behind corporate shells, insulating their own assets if the law ever caught up with them.

In a statement, Recording Industry of America Association chairman/CEO Mitch Bainwol accentuated the importance of Gorton’s personal liability in the case, saying that “the court has sent a clear signal to those who think they can devise and profit from a piracy scheme that will escape accountability.”

In addition, Wood ruled that LimeWire’s “failure to mitigate infringing activities” was itself evidence of inducement. LimeWire could have implemented various filtering technologies to thwart infringement, Wood determined, but didn’t for fear of losing users to rival P2P services that refused to filter. That aspect of the court’s ruling will provide a strong incentive for the operators of various online services to filter or take other affirmative steps to combat infringement, which is precisely what copyright owners have been pressing for years.

Wood’s decision was yet another example of the force of the U.S. Supreme Court’s 2005 decision in MGM v. Grokster, which established that one who distributes software “with the object of promoting its use to infringe copyright” is liable under an “inducement” theory.

The evidence that LimeWire had induced its users to commit copyright infringement was overwhelming. Wood accepted evidence presented by the labels that virtually all of the files “shared” through LimeWire — 98.8 percent by one measure — were infringing, and that LimeWire knew about it. Employees even maintained a file labeled “Knowledge of Infringement.”

PICKING UP WHERE NAPSTER LEFT OFF

The court also cited evidence that LimeWire specifically targeted users of Napster after the pioneering P2P service was shut down by the courts. LimeWire assisted users in their infringement by, among other things, organizing songs into categories including “top 40” and “classic rock.” And the court found that LimeWire’s revenue — which reached $20 million in 2006 — was dependent on the availability of copyrighted songs through its system.

LimeWire didn’t immediately respond to a request for comment. In a statement, CEO George Searle said the company “strongly opposed the court’s recent decision,” but added that it “remains committed to developing innovative products and services for the end user and to working with the entire music industry, including the major labels.”

That stance is more than just empty rhetoric. In 2007, the P2P service launched a licensed MP3 download service called the LimeWire Store, which to date has finalized deals with Nettwerk Music Group, IRIS Distribution, Redeye Distribution, the Orchard and a handful of others.

Additionally, the company brought on several music industry insiders, such as former Sony executive Zeeshan Zaidi as COO and Total Music’s Jason Herskowitz as vice president of product management. Searle also has long stated his desire to reach licensing deals with the music industry and settle the P2P dispute through a business arrangement rather than a legal one.

But the major labels never embraced the overture, given that the overwhelming majority of LimeWire activity was dedicated to the unauthorized downloading of copyrighted entertainment content.

Paradoxically, Wood pointed to LimeWire’s efforts to go legit as proof that the company was aware that the service was being used to illegally acquire copyrighted content and as such should have made more of an effort to prevent it.

The cost of its failure to do so will be determined in the coming months. The labels are expected to seek an injunction against further infringement and will also seek damages, which could reach into the tens of millions of dollars given the more than 3,000 songs at issue in the case.

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