UMG v. Shelter Capital: Copyright

The Ninth Circuit held that Veoh's automated transcoding and playback functions fell within 'storage at the direction of a user,' and that general knowledge of infringement on a video platform does not defeat the DMCA safe harbor.

In UMG Recordings, Inc. v. Shelter Capital Partners LLC, No. 09-55902 (9th Cir. Mar. 14, 2013), the U.S. Court of Appeals for the Ninth Circuit affirmed that the video-sharing service Veoh was protected by the DMCA’s storage safe harbor, 17 U.S.C. § 512(c). The decision, issued in an opinion by Judge Raymond C. Fisher that superseded an earlier December 20, 2011 ruling, is the West Coast counterpart to the Second Circuit’s Viacom v. YouTube, and the two opinions together built the modern architecture of platform safe-harbor law. UMG, one of the world’s largest record companies, had sued Veoh and its investors over user-uploaded music videos, arguing that the safe harbor simply did not apply to a service that did far more than passively warehouse files.

At a glance

Court and date: Ninth Circuit Court of Appeals, opinion filed March 14, 2013, No. 09-55902 (superseding the prior Dec. 20, 2011 opinion).
Disposition: Affirmed in part and remanded in part. The grant of summary judgment to Veoh on the § 512(c) safe harbor was affirmed in full, as was the Rule 12(b)(6) dismissal of the secondary-liability claims against three Veoh investors. The remand was narrow: whether Veoh could recover Rule 68 costs excluding attorney’s fees.
“By reason of storage” holding: Section 512(c) covers more than literal file storage. Veoh’s automated functions (chunking and transcoding uploads into Flash, allowing streaming playback, and enabling downloads) are access-facilitating processes that fall within “storage at the direction of a user.”
Knowledge holding: General knowledge that a service hosts infringing material, or that a category of content (like music videos) is prone to infringement, does not constitute the specific knowledge or red-flag awareness needed to defeat the harbor.
Control holding: The “right and ability to control” under § 512(c)(1)(B) requires “something more” than the general ability to locate and remove infringing material. Agreeing with the Second Circuit’s Viacom decision, the court held the provider must “exert[] substantial influence on the activities of users.”

The “storage” question: hosting that nobody can see is useless

UMG’s most ambitious argument attacked the threshold scope of § 512(c), which limits liability for infringement “by reason of the storage at the direction of a user.” UMG contended that Veoh forfeited the harbor by stepping outside mere “storage”: Veoh automatically broke uploads into 256-kilobyte “chunks,” converted them into Flash format (and, for “Pro” users, into Flash 8 and MPEG-4 as well), extracted metadata to help others find the video, and streamed and allowed downloads of them on demand. These functions, UMG argued, were active transformations of content, not passive storage.

The Ninth Circuit rejected the premise. Storage divorced from access is beside the point: as the court put it, “The reason one has a website is so that others may view it.” Ordinary web hosts, it noted, also copy and transmit user material in order to make it accessible, and the court “cannot see how these access-facilitating processes are meaningfully distinguishable from Veoh’s for § 512(c)(1) purposes.” The court then read the statute’s own text as confirming that its reach is not limited to the bare act of storing. One is “unlikely to infringe a copyright by merely storing material that no one could access,” so § 512(c) “includes activities that go beyond storage”: the provision speaks of “the material or an activity using the material” being infringing, and requires the provider “to remove, or disable access to, the material.” The court accordingly held that the “by reason of storage” language “itself covers the access-facilitating automatic functions Veoh’s system undertakes.” Because each step was triggered automatically by the act of a user uploading a file, the infringement, if any, occurred “by reason of the storage at the direction of a user.” This reading gave § 512(c) the breadth necessary to cover modern hosting platforms, language the district court described as “clearly meant to cover more than mere electronic storage lockers.”

Knowledge: general awareness is not enough

UMG’s second theory was that Veoh had disqualifying knowledge. Like Viacom, UMG pointed to evidence that Veoh’s leadership understood music videos were among the most-trafficked content on the service and that much of it was likely unlicensed. The court held this insufficient. Following its own earlier decision in Perfect 10, Inc. v. CCBill LLC, the Ninth Circuit held that “merely hosting a category of copyrightable content, such as music videos, with the general knowledge that one’s services could be used to share infringing material, is insufficient to meet the actual knowledge requirement under § 512(c)(1)(A)(i).” It reached the same conclusion on the § 512(c)(1)(A)(ii) “red flag” inquiry.

To lose the harbor, a provider must have actual knowledge of specific infringing material, or be aware of facts making specific infringement objectively apparent, and then fail to act expeditiously. The court emphasized § 512(m)‘s rule that the safe harbor does not condition protection on a provider’s affirmative monitoring of its service. The burden of identifying infringement, through the notice-and-takedown machinery, rests with the rights holder. On the record here, UMG itself never sent Veoh a takedown notice before filing suit in September 2007: the only notices Veoh received about UMG’s works came from the RIAA, and UMG did not dispute that Veoh removed the material at the links those notices identified. The court did not rest its knowledge holding on that fact, but it reflects the allocation the court described, under which the copyright owner, not the provider, is the party expected to identify specific infringing material.

Control: “something more” than the power to delete

UMG’s third theory invoked § 512(c)(1)(B), which removes the harbor where a provider receives a direct financial benefit from infringing activity it has “the right and ability to control.” UMG argued that Veoh’s ability to remove files, control its system, and apply filtering technology satisfied this standard.

The Ninth Circuit disagreed. Drawing the phrase from a district court decision, Perfect 10, Inc. v. Cybernet Ventures, Inc., it held that while vicarious liability under Napster can be met by “merely having the general ability to locate infringing material and terminate users’ access,” § 512(c) requires “something more.” Otherwise no § 512(c) provider could ever qualify, because that capacity is a defining feature of every covered service. Turning to the Second Circuit’s then-recent Viacom decision for content, the court agreed with it and held that the provider must “exert[] substantial influence on the activities of users,” which may include high levels of control as in Cybernet, or purposeful conduct as in Grokster. Veoh’s general administrative powers did not meet that bar: that the material sat on Veoh’s system, that Veoh could remove it, that Veoh could and did implement filtering, and that Veoh could have searched for infringing content were not equivalent to substantial influence, and UMG pointed to no other evidence raising a triable issue.

Open questions

What conduct supplies the “something more”? Both Veoh and Viacom defined control by what it is not. The affirmative conduct that crosses the line (aggressive curation, inducement, editorial selection) remains underspecified.
How automated can a function be and still count as “storage”? The court blessed transcoding and streaming as access-facilitating. Whether algorithmic recommendation, monetization tooling, or generative transformation also qualify is unresolved.
Does pre-litigation notice matter? UMG’s failure to send takedown notices loomed large. Whether a rights holder’s choice to litigate rather than notify should bear on the knowledge analysis is a recurring strategic question.

Implications

For platforms: The functions that make user content viewable (chunking, format conversion, streaming, downloads) are protected “storage,” not disqualifying conduct. Building a usable service does not forfeit the harbor.
For rights holders: General knowledge arguments fail. To defeat § 512(c), a claimant generally must show specific knowledge or red flags and, in most circumstances, should use the notice-and-takedown process.
For investors and corporate defendants: UMG also sued Veoh’s venture investors. The decision’s affirmance of the harbor (and rejection of secondary-liability exposure on this record) is a reminder that funding a compliant platform is not, by itself, actionable.
For doctrine: Veoh and Viacom are deliberately convergent. Counsel can cite them together for the specificity-of-knowledge rule and the “something more” control standard across circuits.

Frequently asked questions

Did Veoh win? Yes, on the safe-harbor question. The Ninth Circuit affirmed that § 512(c) protected Veoh. The victory was, however, pyrrhic: Veoh had already filed for Chapter 7 bankruptcy in February 2010, which its founder blamed on the distraction of the legal battles and the broader economic climate.

Why did the court treat streaming and transcoding as “storage”? Because, as the court put it, “The reason one has a website is so that others may view it.” Reading § 512(c)‘s phrase “by reason of the storage at the direction of a user” as broad causal language, the court held it covers the access-facilitating automatic functions that make stored content viewable.

Does a copyright owner have to send a takedown notice before suing? No, the statute does not require it. But § 512(c) places the burden of identifying specific infringing material on the copyright owner, and a compliant notice is the ordinary way to give a provider the specific knowledge that triggers a duty to act expeditiously. UMG itself sent Veoh no notice before suing, and general knowledge alone did not defeat the harbor.