by Lee Gesmer | Oct 1, 2014 | Copyright
One thing that any online “music locker” company that relies on third-party content and hopes to benefit from the DMCA safe harbor should know is that employees should not upload copyrighted content to the service. Nothing will blow up a DMCA defense faster.
It seems that Grooveshark (legally “Escape Media”), didn’t get this message. As Joshua Greenberg, one of Grooveshark’s co-founders wrote to employees in 2007:
Download as many MP3′s as possible, and add them to the folders you’re sharing on Grooveshark. Some of us are setting up special ‘seed points’ to house tens or even hundreds of thousands of files, but we can’t do this alone… There is no reason why ANYONE in the company should not be able to do this, and I expect everyone to have this done by Monday… IF I DON’T HAVE AN EMAIL FROM YOU IN MY INBOX BY MONDAY, YOU’RE ON MY OFFICIAL SHIT LIST.
Strong stuff, and not the kind of thing you want to have pop up in discovery.
Grooveshark has been the target of multiple industry lawsuits. Two, in particular, are an action in SDNY in which the court, on September 29, 2014, entered summary judgment against Grooveshark, and a New York state action alleging infringement of pre-1972 sounds recordings, which at present are not covered by federal copyright law.
However, it is difficult to see how the September 29th decision doesn’t mark the end of the line for Grooveshark. The decision holds Grooveshark and its two founders (Greenberg and Samuel Tarantino) liable for direct and secondary copyright infringement. A few additional quotes from the 57 page opinion tell the story:
- When it began “Grooveshark did not have a large user base to leverage as a source for content.” Therefore, it told its employees “to create Grooveshark user accounts and to store hundreds of thousands of digital music files on their computers in order to upload or ‘seed’ copies of these files to other Grooveshark users.”
- “Escape’s senior officers searched for infringing songs that had [been] removed in response to DMCA takedown notices and re-uploaded infringing copies of those songs to Grooveshark to ensure that the music catalog remained complete.”
- Grooveshark “was aware that its business model depended on the use of infringing content,” but decided to “bet the company on the fact that it is easier to ask forgiveness than it is to ask permission.”
- After moving from a peer-to-peer to a centralized storage model, Grooveshark “designed its … software so that it would automatically copy every unique music file from each of its users’ computers and upload them to the storage library. … Grooveshark referred to this as a ‘cache everything’ policy.” Grooveshark “instructed its employees to obtain copies of digital music files from any possible source and to upload them to the central music library.”
The court found that the Grooveshark employees uploaded more than 150,000 files, and that Grooveshark’s library of songs hit the company’s goal of 2 million files.
Needless to say, Grooveshark’s activities were blatantly illegal. While the DMCA provides safe harbors for web sites that host copyrighted work uploaded by third parties, it has no relevance to works uploaded by company employees, as was the case here. One can only wonder what Grooveshark’s owners and employees were thinking to participate in what bordered on group insanity.
Whether Grooveshark sought legal advice before embarking on this voyage of folly we may never know.
In any event, it is over now. Grooveshark.com will soon be dark, and the two founders will be stripped of their assets or forced into bankruptcy. Grooveshark’s investors (yes, it appears that “angels” may have invested over $6 million in the company) will (to borrow from Samuel Clemens) not only receive no return on their money, they’ll receive no return of their money.
For some additional thoughtful comments on this case in the broader context of how the courts have come to view music sharing sites, see Jeff John Roberts’ post on GigaOm, here.
UMG Recording v. Escape Media Group, Inc. (S.D.N.Y Sept. 24, 2014)
by Lee Gesmer | Sep 19, 2014 | Internet Law
Imagine this.
You go to a new dentist and, before she will take you as a patient she requires you to sign an agreement that you won’t post negative reviews of her on the Internet. You go to book a wedding reception at a restaurant and before they will book your reception they ask you to sign a similar document. Even worse, you must agree that if you do post a negative review, you will owe the restaurant a $500 fine.
The Internet has been full of stories of this sort, but now one state — California — has put a stop to it. And, as is sometimes said when it comes to new laws, as California goes, so goes the country.
A bill signed into law in California on September 9, 2014, popularly referred to as the “Yelp” bill, prohibits the use of “non-disparagement” clauses in consumer contracts. The law takes effect on January 1, 2015.
Under the new law a “contract or proposed contract for the sale or lease of consumer goods or services may not include a provision waiving the consumer’s right to make any statement regarding the seller or lessor or its employees or agents, or concerning the goods or services.” It will also be “unlawful to threaten or to seek to enforce” such a provision, or to “otherwise penalize” a consumer for making any such statement. The law carries statutory penalties ranging from $2,500 for the first offense, up to $10,000 for “willful” violations.
The impact of this law will not be limited to California businesses: it will apply to anyone doing business with consumers in California.
One aspect of this law that is important to understand is that it does not give consumers free license to defame businesses, nor does it limit the right of businesses to sue consumers for defamatory statements. It is limited to using a contract or proposed contract (whether online or on paper) to preclude the publication of reviews — even defamatory reviews — in the first place. If a review is defamatory, the business owner’s legal rights remain as they were before enactment of this law.
Practice tip: it is possible that the new law will be viewed as an invitation to class action plaintiffs to seek aggregated statutory damages. Therefore, it is important that companies that do business with consumers in California (whether the business itself is in California or not), review their contracts and online terms and conditions to remove non-disparagement clauses that would violate this law.
The Yelp Bill – Civil Code Section 1670.8
by Lee Gesmer | Sep 16, 2014 | Noncompete Agreements
Now that the Massachusetts legislature has abandoned (at least until next session) a bill to make employer/employee noncompete agreements unenforceable (or more difficult to enforce) in Massachusetts, we’re back to business as usual in Massachusetts, and how the courts handle these cases remains of interest. And, since the preliminary injunction stage of these cases is so critical, how the courts handle preliminary injunction motions in noncompete cases is of particular interest.
Of course, noncompete law (sometimes statutory, sometimes “judge-made” case law) varies from state-to-state. A recent case highlights the extent to which even the procedure for handling these cases can differ from state-to-state.
In Massachusetts, the trial courts — federal or state — have no obligation to hold an evidentiary hearing when resolving a preliminary injunction motion. Affidavits are usually enough, and its rare to see a hearing with witnesses and cross-examination.
However, this is not the case in the 11th Circuit, which covers federal cases in Alabama, Florida and Georgia. The 11th Circuit recently held, in a noncompete case involving a preliminary injunction motion, that while an evidentiary hearing is not always required before issuance of a preliminary injunction, ““[w]here the injunction turns on the resolution of bitterly disputed facts … an evidentiary hearing is normally required to decide credibility issues. … where much depends upon the accurate presentation of numerous facts, the trial court erred in not holding an evidentiary hearing to resolve these hotly contested issues.”
The case was remanded to the trial court for a hearing.
Moral of the story: if you think an evidentiary hearing will improve your chances on a noncompete preliminary injunction motion, ask for one. Just maybe, you’ll get it. If the appealing party in this case had not asked for an evidentiary hearing, it would have had no basis for complaining, on appeal, about the failure of the court to grant one, and would not have obtained the reversal. While an Eleventh Circuit decision is only persuasive (not binding) on courts outside the Eleventh Circuit, a particular judge in another state could find it very persuasive, and an evidentiary hearing may make a difference in the outcome in the trial court. It also creates the basis for a good faith argument on appeal.
Moon v. Medical Technology Assoc. (11th Cir. Aug. 18, 2014)
by Lee Gesmer | Sep 12, 2014 | Contracts
Online companies have often found it challenging to create enforceble terms of service (“TOS”), and the courts aren’t making it any easier. Perhaps the courts have concluded that, now that the Internet is an established commercial medium, they are not going to cut vendors any slack.
The latest decision illustrating this is the Ninth Circuit’s August 18, 2014 holding in Nguyen v. Barnes & Noble, holding that Barnes and Noble’s browsewrap agreement was not enforeable.
A website “browsewrap” agreement is where the online terms are posted on a site, typically via a link on the site’s homepage. By contrast, a “clickwrap” 
requires the website user to take some affirmative action before engaging in a transaction (such as an online purchase). Typically this amounts to clicking a box on the site indicating that the user agrees to the site’s terms and conditions.
Where the user is not asked to “check the box” and the website relies on the posting alone, things can get messy. Barnes & Noble tried to impose an arbitration clause on a consumer based on a browsewrap, but the Ninth Circuit held that B&N’s browsewrap was not enforceable. Here, as is often true in these cases, the issue came down to vague factors such as where the terms were presented, and whether “a reasonably prudent user” would be put on notice of the terms. In this case, B&N didn’t do enough:
In light of the lack of controlling authority on point, and in keeping with courts’ traditional reluctance to enforce browsewrap agreements against individual consumers, we therefore hold that where a website makes its terms of use available via a conspicuous hyperlink on every page of the website but otherwise provides no notice to users nor prompts them to take any affirmative action to demonstrate assent, even close proximity of the hyperlink to relevant buttons users must click on—without more—is insufficient to give rise to constructive notice. … the onus must be on website owners to put users on notice of the terms to which they wish to bind consumers. Given the breadth of the range of technological savvy of online purchasers, consumers cannot be expected to ferret out hyperlinks to terms and conditions to which they have no reason to suspect they will be bound.
It is far from clear what constitutes a “conspicuous hyperlink” that would satisfy the test in this decision, but online business should stick with clickwrap agreements, rather than push the envelope with browsewraps. For a similar case that I wrote about in 2012, see Online Agreements – Easy To Get Right, Easy To Get Wrong.
Nguyen v. Barnes Noble (9th Cir. Aug. 18, 2014).
by Lee Gesmer | Sep 10, 2014 | Copyright
It’s a sad reality that when the record companies want to get serious, they sue not only companies that they claim have infringed their copyrights, but the owners of those companies. Capitol Records pursuit of Michael Robertson, despite the bankruptcy of MP3tunes, is a classic example. MP3tunes declared bankruptcy and shuttered its service, but Capitol Records (part of UMG), pursued Robertson individually, and obtained a $41 million verdict against him personally.
Capitol is using the same strategy against Redigi (“the world’s first pre-owned digital marketplace”). I’ve written about Redigi several times (see here, here and here). The last of these, Federal Judge Tells Redigi to Shut it Down, posted April 2, 2013, describes the New York federal court’s decision holding that Redigi’s digital resale business is not protected by the first sale doctrine. In that post I noted that Redigi could face millions of dollars in damages, and that liability might not be limited to the company:
Capitol may seek leave of court to add as defendants the individual owners and employees of Redigi that exercised control over or benefited from the infringement. While Redigi could oppose such as motion as coming too late in the case, a decision would be at the discretion of the judge. As Capitol Records showed in its copyright suit against MP3tunes and Michael Robertson, Capitol is not above suing not only corporate infringers but their founders and owners. (See: The Record Labels Want My Minivan).* The philosophy of the record companies in many copyright cases may best be described as, “never kick a man when he’s down, unless that’s the only way to keep him there.” Capitol may be preparing to put on its steel toe boots in this case.
… According to the court decision Redigi consulted legal counsel before launching Redigi and engaging the recording industry in a test case. One can only hope that the attorneys Redigi consulted reminded Redigi of the Chinese proverb, “A piece of paper, blown by the wind into a law court, may in the end only be drawn out again by two oxen.”
It didn’t take long for Capitol to follow exactly that strategy. Five months later, on August 13, 2013, Capitol filed an amended complaint naming Redigi’s founding co-owners, John Ossenmacher (CEO) and Larry Rudolph (CTO) as individual defendants. Ossenmacher and Rudoph moved to dismiss, and the court denied their motion on September 2, 2014, holding that the amended complaint –
specifically alleges that the Individual Defendants were responsible both for the technology ReDigi used and for employing that technology through ReDigi’s business. It also alleges that each of ReDigi’s key activities was performed either at the behest of, or with the approval of, the two Individual Defendants. These are precisely the sorts of factual allegations that, if true, make a corporate officer personally liable for copyright infringement. … the rule is that a corporate officer is personally liable for the corporation’s infringement if he had the ability to supervise the activity and a financial interest in it, or if he personally engaged in the infringing activity.
This development just serves to thicken the plot in a case that many observers have been hoping will make it to the Second Circuit on appeal.
Will the judge’s refusal to dismiss Ossenmacher and Rudolph as defendants (albeit only on a motion to dismiss, which is by no means a final decision) now be enough to force Redigi to shut its doors? Would closure of Redigi be enough to settle the claims against the two individuals, or is Capitol out to make an example in this this case?
On the other hand, it’s possible that the founders of Redigi were well-advised before starting this company, and that they put their personal assets beyond the reach of creditors. Redigi made much of the fact that its technology was vetted and approved by a legal team before they released their service. Hopefully, this included a strategy to frustrate Capitol’s attempt to reach their personal assets.
Capitol Records v. Redigi – First Amended Complaint
September 2, 2014 Order Denying Motion to Dismiss Ossenmacher and Rudolph
