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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?
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.
Cyberlocker sites come under the radar of copyright holders
By Nick Solish
In the war of music pirates versus record labels, cyberlockers are heating up as the next battleground for copyright suits. A cyberlocker is an online storage provider that allows users to upload and share files. Other users can then access those uploaded files for free, simply by clicking a link to the site and a second link to download the file.
This recent battle started earlier this year when the Motion Picture Association of America (MPAA) sued Fort Lauderdale-based Hotfile.com. Plaintiffs Disney Enterprises Inc., Twentieth Century Fox Film Corp., Universal City Studios Productions LLLP, Columbia Pictures Industries Inc., and Warner Brothers Entertainment Inc., all sued Hotfile Corp. and Hotfile’s owner, Anton Titov, in the Southern District of Florida alleging copyright infringement.
The suit alleges that “[d]efendants actively encourage their users to upload…infringing copies of the most popular entertainment content in the world.” Further, plaintiffs argue that defendants openly pay users to upload, and disseminate links to, infringing content. The complaint also claims that Hotfile uses a cash incentive program to encourage users to upload infringing content.
Since January 2011, cyberlocker sites have been drawing more traffic than BitTorrent sites, bringing to the attention of copyright holders. Predictably, these sites often contain access to copyrighted files. Hotfile itself has become one of the top 100 most trafficked sites on the Internet, making it a target for the MPAA.
Cyberlocker sites like Hotfile.com include disclaimers about compliance with the Digital Millennium Copyright Act as well as a process for filing take-down notices. Cyberlocker services are not inherently illegal. However, the plaintiffs allege that Hotfile’s use of a cash incentive program encourages people to upload infringing content to the site.
Hotfile may have initially been targeted because it had a track record of settling lawsuits against its service. However, they recently changed tactics. In April 2011, Hotfile filed a motion to dismiss the suit, which was followed by a ruling in July that dismissed the direct infringement claims against Hotfile. The judge found thatplaintiffs had failed to plead the necessary facts proving that Hotfile engaged in the required volitional conduct for a direct infringement of copyright law.
However, University of Texas law professor Christopher Harrison speculates that the decision throwing out the direct infringement claim may not survive on appeal. Harrison explains that Judge Adalberto Jordan’s reliance on Cartoon Network LP v. CSC Holdings Inc., 536 F.3d 121 (2d Cir. 2008) for the proposition that “a significant difference exists between making a request to a human employee, who then volitionally operates the copying system to make the copy, and issuing a command directly to a system, which automatically obeys commands and engages in no volitional conduct” may be misplaced.
Specifically, in Cartoon Network, defendant’s remote DVR system responded to commands from Cablevision subscribers and created a single, unique copy of a TV show for later viewing by that same subscriber. In [Hotfile], not only are uploaded files available to anyone using the site, Hotfile’s servers automatically make five additional copies of uploaded files and five unique links for those files. This seems to be a clear distinction.
However, in a recent filing, Hotfile has shown that it may be willing to fight back. Plaintiffs filed a motion to limit privilege logs that they are required to produce in the case. Privilege logs describe documents or other items withheld from production in a civil suit under claims of attorney-client privilege, work product doctrine, or trade secrets. The burden is on the withholding party to give the court and the opposing party enough information to test the privilege claim.
Hotfile opposed this motion, asking that the plaintiffs produce the standard, required privilege logs. In their opposition motion, Hotfile’s lawyers stated in a footnote that “[b]eing able to determine which withheld documents are related to [p]laintiffs’ cooperative antipiracy efforts to remove material from Hotfile is also important for a counterclaim Hotfile intends to bring against at least one of the [p]laintiffs — Warner Bros. Entertainment, Inc..” They allege that Warner has abused their anti-piracy tool by using it to remove content, which either was not infringing or for which Warner did not own the copyrights.
The MPAA complaint wasn’t the first major suit for Hotfile. In January 2011, plaintiff Liberty Media filed suit against Hotfile and 1,000 John Does alleging that jointly and severally, with actual or constructive knowledge of or with willful blindness, reproduced and distributed certain Liberty-owned works through www.Hotfile.com. Liberty demanded that the court freeze Hotfile’s assets held by PayPal and that the court seize Hotfile’s domain name in the meantime.
As of yet, Hotfile has not filed its counter-suit against Warner or any other copyright holders. Should these cases be successful, they may ignite a storm of litigation against other cyberlockers that could virtually shut these services down or severely limit their inherently legal function. The MPAA case against Hotfile will certainly be a strong indicator of what the future holds for other cyberlockers and whether they can survive legal scrutiny.
Nick Solish is a lawyer at Bryan Cave and recent graduate of the University of Texas. He can be contacted at nickolas.solish at bryancave.com.
Is Use of a Competitor’s Trademark for Advertising Infringement?
By Nick Solish
Originally published in the Daily Journal, Los Angeles on July 5, 2011
Suppose that you were looking for a plumber and a friend recommended Joe’s Plumbing to you. You might type Joe’s Plimbing into Google.com’s search engine and hit enter. The first thing you see is a link for Eric’s Plumbing, who claims to be as good as Joe’s Plumbing but with much lower rates. If you hire Eric’s Plumbing instead of Joe’s Plumbing, does Joe’s Plumbing have a claim against Google for diverting a potential referral?
Advertising on Google is controlled through their AdWords service. Google’s help section explains that, “AdWords ads are displayed along with search results when someone searches Google using one of your keywords.” Advertisers can use Google’s keyword suggestion tool to generate suggested keywords with which to associate their ads. Thus, a search for a specific term will bring up a specific ad. Just as anything can be searched for on Google, any word can become a keyword for purposes of AdWords. As such, brand names and other protected trademarks can be purchased as keywords from Google AdWords.
Google’s keyword suggestion tool had been recommending “Rescuecom” to advertisers of computer repair services on AdWords. Thus, a search for “Rescuecom” would also contain advertisements for competitors of Rescuecom above and alongside regular Google search results. However, “Rescuecom” was a registered trademark. In 2006, Rescuecom brought an action against Google alleging that Google was liable under the Lanham Act for infringement, false designation of origin, and dilution of Rescuecom’s eponymous trademark. Specifically, Rescuecom alleged that Google’s placement of advertising in search results misled users into believing that competitors’ ads appearing on screen were part of a relevance-based search for Rescuecom.
Trademark law under the Lanham Act, 15 U.S.C. Sections 1114 and 1125, imposes liability for unpermitted “use in commerce” of another’s mark, which is “likely to cause confusion, or to cause mistake, or to deceive,” regarding “the origin, sponsorship or approval of his or her goods [or] services . . . by another person.” The trial court did not even reach the question of whether Google’s use was likely to cause confusion or mistake of origin because it found that Google’s actions did not constitute a use in commerce of Rescuecom’s trademark.
On appeal, the 2nd U.S. Circuit Court of Appeal, disagreed with the trial court. Rescuecom Corp. v. Google Inc., 562 F.3d 123 (2nd Cir. 2009). Both decisions were largely governed by each court’s interpretation of the 1-800 Contacts Inc. v. WhenU.com Inc., 414 F.3d 400 (2d Cir.2005) decision, which had discussed when use of a trademarked term by an advertiser constituted a “use” for purposes of the Lanham Act. 1-800 Contacts involved an advertising program made by WhenU.com called “Save Now.” Save Now was a program that launched pop-up advertisements when users visited specific Web sites in Save Now’s index.
Unlike Google, WhenU’s software did not allow advertisers to purchase specific keywords to associate ads with. The 2nd Circuit in 1-800 Contacts also noted that Save Now only triggered ads by using the plaintiff’s Web address, not plaintiff’s protected trademark. Also, because Save Now did not publish the index of Web sites it advertised on and kept this list private, the court found that Save Now’s use of plaintiff’s trademark was not a “use in commerce” under the Lanham Act.
The trial court in Rescuecom had held that 1-800 Contacts was relevant precedent and thus, that Google’s use of the Rescuecom trademark was not a “use” under the Lanham Act. The 2nd Circuit disagreed, distinguishing 1-800 Contacts on two counts; the Web address complained of by plaintiff was not actually a protected trademark, and because of a distinction with between Save Now’s mechanism of action and Google’s.
To elaborate on the latter, while Google searches brought forth specific advertisements when specific keywords were searched for, Save Now’s pop-ups were random and not associated with specific keywords. Further, advertisers were not able to purchase keywords to trigger their advertisements using Save Now. Instead, advertisements were displayed based on general categories rather than by use of specific keywords. Save Now also did not allow for the sale of specific keywords to advertisers.
These aspects were in direct contrast with the 1-800 Contacts decision, according to the 2nd Circuit. Google was selling Rescuecom’s trademark as a keyword to competitors through the AdWords service. Likewise, Save Now does not “use or display” the trademark in 1-800 Contacts, but Google “displays, offers and sells” trademarks such as Rescuecom’s to the highest bidder, thus triggering protections under 15 U.S.C. Section 1127. The court also agreed with Rescuecom that Google’s placement of sponsored links directly above search results could lead to confusion, as Rescuecom had alleged in its initial complaint.
Google compared its keyword suggestion tool to the practice of vendors placing generic products next to name brand equivalents. However, the court was largely unpersuaded by Google’s analogy; although refusing to rule on whether Google’s use of Rescuecom’s trademark actually caused likelihood of confusion or mistake, the court did vacate the trial court’s decision and remand the case for further proceedings.
On remand, Rescuecom filed for dismissal before the trial began, claiming victory over Google in a May 2010 news release. But Rescuecom’s decision not to pursue the case on remand appears to have left some legal questions unanswered. The 2nd Circuit’s opinion, however, seems to leave room for future plaintiffs to seek redress against Google and other Web advertisers for similar trademark claims.
In a memorandum and order for Jurin v. Google Inc., 2010 U.S. Dist. LEXIS 94020, a related California case, plaintiff, the owner of the trademark “Styrotrim,” sued Google alleging that it had, through AdWords, misappropriated this trademark and generated advertising revenue while committing trademark infringement. Plaintiff also claimed that advertisements appearing on searches for Styrotrim might confuse users. Plaintiff analogized his case to Rescuecom but the court disagreed, distinguishing that decision by saying it relied mostly on the “use in commerce” portion of the Lanham Act, which was not in issue in this case.
It is unclear whether future litigation will lead to profit sharing between advertisers like Google and owners of registered trademarks sold as keywords. Altogether, the courts have yet to clarify whether the Lanham Act provides protections for owners of trademarks when those trademarks are sold as keywords to advertisers. However, future litigation will almost certainly arise in this area and the outcome will likely involve a great deal of revenue, whether it remains with the advertiser such as Google or must be paid out to the rightful trademark owners.
Nick Solish is a lawyer at Bryan Cave and recent graduate of the University of Texas. He can be contacted at nick.solish@gmail.com.