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Clever cyber criminals scam iTunes for “Madonna-level” royalties

Originally published in the Los Angeles Daily Journal in April, 2012

By Nickolas Solish

 

In an era when most cyber-criminals are ordinary people accused of violating copyright through illegal downloading, an Internet-savvy group has found a novel way to defraud the online music world.  A group of twelve criminals worked out a unique scheme to defraud major music sellers through an elaborately devised method of laundering money.

The hooligans took advantage of online music vendors, iTunes and Amazon, by putting their own music up for sale and then using stolen credit cards to purchase it, receiving payments in royalties.

The gang of 12 was led by 24 year-old Craig Anderson, who organized the scheme and purchased two-dozen laptops to carry it out.  Anderson recruited the rest of his “team” to purchase the music using stolen credit card numbers.  In an attempt to avoid unwanted attention, each purchase was under £10 and the IP address of each computer was masked using a website called Hide My IP.

During 2008 and 2009, the group brought in £500,000 in royalty payments from the illegal purchases. The tip-off for iTunes was when they realized just how much in royalties they were paying to “DJ Denver,” a small, unheard of musician from Wolverhampton, England. The frequency and amount of royalty payments matched what iTunes pays to artists like Madonna.

Authorities noticed that DJ Denver was selling so well he was charting on high-volume download sales charts.

The scheme cost iTunes and Amazon between £750,000 and £1 million, according to English prosecutors. Interestingly, the thieves’ attempt to use the Hide My IP website backfired, as it failed to mask their computers’ specific IP addresses. The police were able to trace the purchases back to the computers and link them with Paypal addresses, which lead them to the gang.

Once the scheme was discovered, royalty payments were withheld, at which point a “Daniel Thompson” called Tunecore demanding payment of the outstanding royalties. Unbeknownst to him, Tunecore was aware of the fraud and persuaded him that the only way he could get his royalties was if he flew to New York to pick them up.

Tunecore offered to send him free plane tickets, at which point he gave he real name and address. From there, the police were able to uncover the entire scheme, netting twelve people total involved.

Ringleader Anderson was given a four year and eight month prison sentence. The musician who provided the songs was one James Batchelor, who pled guilty to conspiracy to defraud and received a two-year sentence. Other members of the group were given suspended sentences and ordered to do community service.

First sale: do you own or rent your digital media files?

February 19, 2013 3 comments

Originally published in the Los Angeles Daily Journal on 2/12/13

By Nick Solish

A report by Billboard Media and Nielsen Soundscan showed that digital music purchases accounted for 50.3 percent of total music sales in 2011, overtaking physical media for the first time. With the rise in digital purchases, music stores and bookstores, along with other retailers, are closing all over the country.

Any person who has ever owned a book or CD knows that either can be resold or given to a friend without violating copyright law. This principle is an important limitation on copyright law known as the first sale doctrine and is codified at 17 U.S.C. Section 109. The United States Attorney’s Manual explains that the first sale doctrine “provides that an individual who knowingly purchases a copy of a copyrighted work from the copyright holder receives the right to sell, display or otherwise dispose of [that particular copy], notwithstanding the interests of the copyright owner. The right to distribute ends, however, once the owner has sold [that particular copy].”

Lawmakers are faced with the question of whether the first sale doctrine should apply to purchases of digital media, including mp3s and eBooks. Digital media transfers invoke two different protected rights under copyright law. The first is the distribution right, allowing the copyright holder exclusive the exclusive right to make a work available to the public by sale, rental, lease or lending. The first sale doctrine acts as an exception to this rule, allowing purchasers of a particular copy of a copyrighted work to sell, rent or lend that copy to another.

Digital media transfers also implicate the reproduction right, which states that no one other than the copyright owner may make any reproductions or copies of the work. A transfer of a physical book or CD does not leave the original owner with a copy. However, every time a digital file is sent via email or saved to a disc a copy is made, leaving both the sender and the receiver with a copy of the file. Thus, the argument is made that first sale doctrine should not apply to digital media purchases because it violates the copyright owner’s exclusive right to make copies of a protected work.

Arguments have been made on both sides as to whether the first sale doctrine should protect digital purchases. Those in favor of extending the first sale doctrine to protect digital purchases argue that transmitting a file from one computer to another and deleting the original copy is the equivalent of selling or lending a book. Opponents of this change argue that the doctrine only protects the distribution right of the consumer and not the additional reproduction right that is an essential part of transferring digital content. They also argue that it would be virtually impossible to test that users had deleted the original copy after transferring a copy, leading to inevitable cheating of the system.

Weighing the above arguments, the U.S. Copyright Office has so far declined to extend first sale protections under Section 109 of the copyright code to digital purchases. “Unlike the physical distribution of digital works on a tangible medium, such as a floppy disk, the transmission of works [through the Internet] interferes with the copyright owner’s control over the intangible work and the exclusive right of reproduction. The benefits to further expansion simply do not outweigh the likelihood of increased harm.”

Some eMedia sellers have creatively taken on this challenge by changing purchasers into licensees instead of owners of content. In recent months, a Norweigan Amazon Kindle owner, Linn Nygaard, lost her Kindle and was told that since Amazon did not have offices in Norway, she would have to provide a U.K. mailing address to receive her replacement. A day later, her account was locked and she was denied access to her eBook library. Within 24 hours, several websites including BoingBoing, The Guardian and TechDirt, carried the story, bringing international attention to the issue. When her story went viral, Amazon eventually restored her access, but merely stated via employee Kinley Pearsall that, “[a]ccount status should not affect any customer’s ability to access their library. If any customer has trouble accessing their content, he or she should contact customer service for help.”

The Amazon Kindle store terms of service state that “Amazon Kindle content is licensed, not sold.” Amazon also provides that violation of any part of the agreement may result in loss of all of your purchased Kindle content: “[Termination]. Your rights under this Agreement will automatically terminate if you fail to comply with any term of this Agreement. In case of such termination, you must cease all use of the Kindle Store and the Kindle Content, and [Amazon may immediately revoke your access to the Kindle Store and the Kindle Content without refund of any fees].”

While it is unclear whether Nygaard did in fact violate the terms of service, many people do not realize that their purchased content is rented and not owned. The same terms of service limit a purchaser’s ability to resell or share content, which might otherwise be protected under the first sale doctrine: “[u]nless specifically indicated otherwise, you may not sell, rent, lease, distribute, broadcast, sublicense, or otherwise assign any rights to the Kindle Content or any portion of it to any third party.”

While there is not yet a digital marketplace for secondary sales of eBooks, the company ReDigi has created a secondary marketplace for reselling music purchased from the iTunes store. ReDigi does not purchase and resell used digital music files, but rather creates a marketplace where users sell music files from one person directly to another.

Launched in October of 2011, ReDigi was sued by Capitol Records in 2012 for copyright infringement. The complaint brings up the question of whether purchasers of digital content are licensees or owners, implicating the first sale doctrine and fair use. ReDigi argued that their Atomic Transaction software allowed the transfer of a digital file without copying it, avoiding a violation of the reproduction right.

Captiol Records argued that ReDigi is liable for copyright infringement, contributory copyright infringement, vicarious copyright infringement, and inducement of copyright infringement. Capitol also claimed that copies of music files were made when first transmitted to ReDigi’s cloud servers, and during sale transactions, thus infringing copyright, and claimed $150,000 of damages per infringement.

While the future of the first sale doctrine in the digital era is still uncertain, quite a bit of money is at stake. A Nielsen study showed over 1.34 billion digital music units were purchased in 2012. If purchasers can resell their songs, this could significantly cut into the market for new digital music. However, if the licensee model becomes the norm, users may have to get used to not “owning” their eBooks and mp3s but rather having entire libraries on long term loan from retailers.

Hotfile getting hotter: The cyberlocker site fires back at Warner Bros.

September 16, 2011 Leave a comment

By Nickolas B. Solish

This is a follow-up to “Cyberlocker sites come under the radar of copyright holders,” which ran in the Daily Journal on Aug. 19.

Striking back against its accusers, the file-hosting website Hotfile.com has brought a countersuit against Warner Bros. Entertainment alleging copyright fraud and abuse.  The complaint accuses Warner Bros. of abusing Hotfile’s anti-piracy tool by filing false copyright take-downs notices.  These notices are only to be used for copyrighted files owned by Warner Bros..  Now the Florida-based company is seeking damages from the movie giant.

The complaint comes after an earlier suit this year against Hotfile by the Motion Picture Association of America, an association of five major Hollywood studios.  The suit is based on a larger campaign by the MPAA to attack copyright abuse on cyber-locker sites.  A cyberlocker is an online storage provider that allows users to upload and share files.  Visitors to the site then can download those files for free by clicking a link.

Cyberlocker sites came under the attention of the MPAA due to a spike in traffic since the beginning of 2011.  These sites now receive more traffic than BitTorrent sites, bringing them under scrutiny by the major studios.  Hotfile recently became one of the top 100 visited websites in the world.

Hotfile’s recent suit against Warner Bros. is a counter-claim to the original MPAA action.  The counterclaim accuses Warner Bros. of “repeated, reckless and irresponsible misrepresentations to Hotfile falsely claiming to own copyrights in material from Hotfile.com.”  The complaint goes on to say that Hotfile even told Warner Bros. about these misrepresentations, but even this did not stop the false claims.

To fight copyright abuse, Hotfile provides “special rightsholder accounts” to certain copyright owners.  Warner Bros. had such an account assigned to their manager of anti-piracy Internet operations, Michael Bentkover.  The tool allowed an unlimited amount of file-takedowns by copyright holders, so long as the complainant held the copyright to the file.

Many of the files taken down by Warner Bros. were not files for which they owned copyrights.  Hotfile alleges this was a breach of the special rightsholder account agreement, which provided that when Warner Bros. reported a file, it was asserting “under penalty of perjury that [it is] the owner or an owner or an authorized legal representative of the owner of copyrights.”  Warner Bros. also represented that it had a “good faith belief” that the owner did not authorize use of the file on Hotfile.com.

Warner Bros. is accused of “willful blindness” in its use of the special rightsholder account.  The complaint points out that Warner Bros. searched for a file entitled “The Rite,” which had been uploaded to filesonic.net, not Hotfile.com.  “[B]ecause Warner apparently went to a third party search site looking for links to The Rite, it returned a page containing not only the filesonic link to The Rite but also dozens of seemingly unrelated links to other files at filsonic.com, Hotfile.com and other sites.”  Warner then “used the [special rightsholder account] to delete each of the twenty or so Hotfile links listed on that page even though . . . none appear to have any relationship to The Rite or to Warner.”  Warner Bros. is accused of deleting “hundreds if not thousands” of similar files in this manner.

Interestingly, there is speculation that Warner Bros. had a financial incentive other than preventing infringement for taking these files down.  A deal was proposed by Warner Bros. to replace files removed for infringement with links to purchase Warner-owned content.  If Warner Bros. takes down more files, they create more links to paid content sites.

The three counts Hotfile alleges are violations of the Digital Millennium Copyright Act, intentional interference with a contractual or business relationship, and negligence.  The complaint demands a jury trial and asks for compensation for lost revenues caused by Warner Bros’s actions.  Finally, the complaint asks for a permanent injunction requiring Warner Bros. to individually review every file they request to be taken down.

This suit and the original MPAA suit have the potential to greatly alter the legal landscape for cyberlocker sites on the Internet.  Hotfile’s countersuit will also clarify how much legal recourse websites have against big copyright holders under the DMCA.  A trial date has not yet been set.

Sink or Swim: Can Grooveshark Maneuver the Ocean of Copyright Laws?

By Nick Solish

Imagine using the Internet to listen to any song you wanted to for free.  Now imagine putting those songs into playlists, sharing them with friends, and listening to them from your mobile phone.  This is the concept behind Grooveshark.com, listed in Time Magazine’s “Best Websites of 2010,” a Web site where users can upload music and listen to other users’ musical uploads.

Recently, Google.com removed Grooveshark’s application from the Android mobile store for violating Google’s terms of service.  Google did not mention any specific violation, but has recently courted record labels and copyright holders in anticipation of Google’s new music downloading service.  There was also speculation that record companies pressured Google to remove the application or face legal action.  Apple Inc. similarly removed its iPhone Grooveshark application in August, 2010 after receiving a complaint from Universal Music Group, who is currently in litigation against Grooveshark.

In response to Google’s recent action, Grooveshark’s Senior Vice President of Information Products, Paul Geller, wrote an open letter claiming their operation is entirely legal.  Geller cites Grooveshark’s FAQ page, which states they will honor “take down claims” that fully comply with the Digital Millennium Copyright Act (DMCA) terms and will remove infringing content.  Compliance with DMCA “take down claims,” argues Grooveshark, brings them under the same protection as Youtube.com, who is only required to take down offending videos if a proper “take down claim” is filed and deemed legitimate.

Geller also noted that Grooveshark has secured licenses with thousands of artists and is working to secure licenses with others.  Grooveshark claims to pay copyright holders for sound recordings played through its service.  Furthermore, it has taken down almost two million infringing files and suspended over 20,000 user accounts for copyright infringement.  A 2009 suit with EMI Music, one of the big four record companies, was dropped in favor of a licensing deal; Grooveshark hopes more record companies will follow.

However, it is unclear that compliance with the DMCA is sufficient to make Grooveshark’s operations entirely legal.  Whether its operation is protected by the copyright code may hinge on whether Grooveshark is deemed an interactive service as defined in 17 U.S.C. Section 114(j)(7).  In Arista Records LLC v. LAUNCH Media Inc., 578 F.3d 148 (2d Cir. N.Y. 2009), a consortium of groups led by BMG, the third largest group of record labels, sued Yahoo’s interactive radio service, LaunchCast, under the DMCA.  The DMCA requires an interactive service to pay licensing fees to content owners, whereas a non-interactive service merely has to pay a smaller statutory licensing fee.

The appellate court in Arista Records discussed the definition of an interactive service under the DMCA as a service “enabl[ing] a member of the public to receive a transmission of a program specially created for the recipient, or on request, a transmission of a particular sound recording, whether or not as part of a program, which is selected by or on behalf of the recipient.”  The phrase “specially created” is ambiguous and the court examined Congress’ intent in enacting the 1972 Copyright Act to determine what “specifically created” meant, finding the intent behind the protection of sound recordings was to prevent piracy.  Radio stations were exempted as radio broadcasting was considered free advertising for record companies.

In response to the growth of Internet radio, Congress enacted the Digital Performance Right in Sound Recordings Act (DPSR) in 1995. This gave copyright holders of sound recordings an exclusive, but narrow, right to perform or play sound recordings via digital audio transmission.  This right only extended to performances through paid subscription services and “interactive services.”  These service providers were required to obtain licenses for each sound recording performed, while non-interactive services qualified for the much lower statutory licensing fees set by the Copyright Royalty Board.  The law was partly enacted because it was believed that interactive services would be a greater detriment to record sales than non-interactive services, which more closely mirrored traditional radio.

The Copyright Act defines a service as interactive if it is either specially created for the user or if a user can use the service to find and play a specific song.  The 2nd Circuit determined the LAUNCHcast service would be interactive if a user could request and play a particular sound recording or have a program specially created on request.  LAUNCHcast does not do this, rather, it bases song recommendations on genres a user enjoys and on a song rating scale.  Consequently, the 2nd Circuit deemed it as non-interactive and thus, not responsible for individually licensing performed sound recordings.  Applying this criteria, Grooveshark seems to be an interactive service under the DPSR and the 1972 Copyright Act.  It allows users to play specific sound recordings at their request, meeting the 2nd Circuit’s criteria for an interactive service.  Thus, despite Grooveshark’s compliance with take down notices, it is unclear how this will shield them from liability under the DPSR interactive services provision.

In January 2010, UMG brought suit against Grooveshark in New York state court.  UMG’s suit is unusual because it was not filed in federal court and only pursued violations against pre-1972 recordings.  Filing specifically for these violations allows UMG to recover under both federal and state law, whereas post 1972 recordings would only be recoverable under federal law.  A New York case, Capitol Records Inc. v. Naxos of America Inc., 262 F.Supp.2d 204 (2003), held that pre-1972 recordings are protected under state copyright law because 17 U.S.C. Section 301(c) allows recovery for these recordings under state common law or state statutes until Feb. 15, 2067.   Grooveshark faces an uphill battle both because it is dealing with unfamiliar state common law remedies, and because it is located in Florida.

UMG does not specifically allege that Grooveshark is an interactive service and therefore owes compulsory licensing fees under the DPSR.  However, UMG does allege that users access protected content on Grooveshark through a search, and when a file is played, Grooveshark’s Web site creates a copy of that sound recording on the user’s computer, which then plays for the user via streaming.  Furthermore, UMG discusses Grooveshark’s VIP service where users are charged a monthly fee but can store music on their phones, like an mp3 player.  These allegations form the basis for its copyright infringement claim, based on illegal distribution and copying of protected content.

UMG is using the Naxos decision to seek additional remedies that may be prohibited under the 1972 Copyright Act.  The Naxos court noted that “‘where a product is placed upon the market, under…statement that the substitute or imitating product is a duplicate of the original, and where the commercial value of the imitation lies in the fact that it takes advantage of and appropriates to itself the commercial qualities, reputation, and salable properties of the original, equity should grant relief.’”  Escape Media Group (EMG), Grooveshark’s parent company and defendant in UMG’s suit, mostly denied the allegations of the complaint in their answer without further explanation.  However, EMG specifically denied that any of the features of Grooveshark’s VIP service were designed to enhance infringement and distribute any sound recordings to users.

It remains to be seen whether Naxos will be interpreted to allow common law or state statutory remedies against Grooveshark.  Its files do seem to imitate real mp3s by acting as duplicates of songs users must otherwise purchase, which makes the service commercially valuable.  Grooveshark may argue they are equivalent to an Internet radio service, but giving users control over songs played distinguishes it from traditional radio, or even Internet radio companies.

While it is unclear whether UMG will succeed in its suit, it does seem like Grooveshark will be swimming upstream.

*Originally published in the Los Angeles Daily Journal on May 2, 2011.  Reprinted with permission.  

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