Caveat investor
A lawsuit accusing Napster investors Hummer Winblad and Bertelsmann of contributory copyright infringement should proceed to trial, says Judge Patel, who presided over the original suit against Napster. Napster-the-corporation is long bankrupt and defunct, of course, so the record companies, music publishers and composers that sued the company have been seeking compensation from its investors. They claim the investors “exercised essentially full operational control over Napster” while the company was infringing their copyrights. If that can be proven, says the judge, they may well be liable.
This possibility has sent shivers down the spines of many tech industry investors. As Judge Patel reminds us, the theory of contributory copyright infringement liability established by the Supreme Court in the Grokster case “does not require actual or even reasonable knowledge of specific infringing files.” In other words, if an investor is exercising operational control over a company with awareness that the company is promoting its products or services for infringing uses, the investor may be liable for contributory copyright infringement, regardless of whether the products or services have substantial non-infringing uses and regardless of whether it’s aware of specific instances of infringement.
This case has been on the dockets for some time, and Hummer Winblad and Bertelsmann haven’t yet been able to shake it. We’ll see where it goes from here, but I don’t think VCs should panic just yet. In my view, the threshold for investor liability is – and is likely to remain – fairly high. Some speculate that a court might one day impute infringement liability to an investor that doesn’t take a board seat or otherwise influence the day-to-day operations of a company. I think liability based solely on making an investment is unlikely unless an investor knows at the time it invests that the company is inducing clearly infringing behavior. In Napster’s case, there was a lot of damning evidence that the company knew it was inducing infringement, like co-founder Sean Parker’s memo that said the company needed to “remain ignorant of users’ real names and IP addresses ‘since they are exchanging pirated music.’” If you know that memo exists — and, yes, these days your due diligence should probe for problems like this — then, by all means, don’t invest. But there’s a difference between encouraging teenagers to rip songs when even they know they’re ripping them off, on the one hand, and providing a product or service that has substantial non-infinging uses while studiously not encouraging potentially infringing uses, on the other.
I’m willing to go even further: There’s still plenty of genuine ambiguity about the legal boundaries surrounding many types of unlicensed uses of others’ copyright material on the Net. Where there are very credible arguments that behavior encouraged by a product or service provider is not an act of infringement, I believe even active investors are consideraly less exposed. In the Napster case, so much scrolls back to the fact that everyone at the company basically knew kids were using the Napster system to steal music — or at least knew that the arguments to the contrary were fairly thin and speculative.
Judge Patel’s opinion, which I’ve just read on a password protected site, contains the best, short synthesis of the various trial and appellate court Napster and Grokster opinions I’ve seen to date. I’ll try to post or link to a copy of the opinion later.
December 4th 2006, 1:14pm