House of Cards: Will Copyright Issues in Online Distribution Topple Foundations or Revolutionize the Film and Television Industries?

Vol. 6 No. 5

By

Laura Possessky is a member of Gura & Possessky, PLLC. She specializes in media and entertainment law.

Netflix topped 40 million worldwide subscribers during the third quarter of 2013 and now has more U.S.-based subscribers than HBO.1 Its original program House of Cards was the first online program to garner an Emmy (three, in fact)—and a remarkable nine Emmy nominations.2 As Netflix breaks records and achieves landmark firsts, it harbingers the arrival of the “new normal” in media content distribution: the personalized portable online platform.

We are in the midst of an entertainment industry revolution. A convergence of technological, economic, and legal developments has led to the complete transformation of how consumers access and view programming. Consumers have the ability to decide when and where to view content and even whether to interact with it. With established media conglomerates initially resistant to change, new companies and new distribution models have emerged to fill the increasing demand, pushing the entire entertainment industry into a new realm of content-viewing experiences. Equally dramatic technological advances on the content production side of the industry have made it feasible for programming to be developed and delivered more economically. These transformations in the entertainment industry have resulted in major breakthroughs in developments for online distribution and original online programming for consumer digital platforms.

As online media establishes its dominance over film and television markets, the navigation of current legal standards and how these standards apply in the online context will significantly impact the future of the industry. The complex web of laws and regulations that affect the entertainment industries will either pave the way for innovation or place a stranglehold on growth. Legal wrangling over bandwidth, compulsory licensing, union collective bargaining agreements, and copyright have all been fueled by the transformations brought about by media convergence.

Among these disputes, challenges in copyright law play a pivotal role in an industry where “content is king.” The discrepancies in doctrinal interpretation of copyright law as it applies to the new environment of media convergence will impact the evolution of online distribution. Because of the high stakes of potential infringement liability and its impact on evolving business models, the outcome of current cases like Viacom International Inc. v. YouTube, Inc., and American Broadcasting Cos. v. Aereo, Inc., will shape the future of the industry. These legal challenges reflect the latest iteration of long-standing conflicts between media content owners and Internet providers, and ultimately will play a leading role in determining who holds, or gains, market dominance.

The Entertainment Industry Revolution

The convergence of media distribution across multiple digital platforms (PCs, tablets, gaming consoles, cell phones) has dramatically transformed the consumption of entertainment content, shaking the foundations of the film and television industries and blurring the lines between historically distinct markets and channels of distribution. The entertainment industry’s shift to online content distribution has resulted in significant market growth and changes to business models for content development and licensing. While seemingly occurring overnight, the new online distribution market is the result of over a decade of intersecting developments that have converged in a fortuitous perfect storm.

The most significant factor driving the convergence in media distribution is rapidly advancing mobile-device technology. Innovations in smartphone and tablet technologies coupled with increasing data processing speeds and storage capacity have made viewing long-form multimedia video content viable on mobile devices. Along with these technological advancements, the Federal Communications Commission (FCC) paved the way for online video streaming by opening up access to wireless broadband spectrums3 and adopting rules for open Internet (a.k.a. “net neutrality”).4 These developments allow consumers to have instantaneous and around-the-clock access to content through high-speed networks on personal mobile devices.

Technological advances have also transformed media production. Advances in digital technology have dramatically lowered the barriers to entry for content production through improvements in the quality and affordability of digital equipment, making it possible for just about anyone to produce video content (as evidenced by the surge in user-generated content sites like YouTube). Previously anyone desiring to make high-value video content would require studio space, professional cameras, lighting and editing equipment, film, and other costly capital investments. Digital technology has greatly reduced production costs, eliminating the need for film and allowing the creation of professional, high-quality images and sound at a fraction of the price. Similarly, editing tools have made it possible to create professional-grade video in the comfort of one’s own home. All of these changes have made production companies less dependent on major studios and networks for content development and production.

Consumer preferences have kept pace with these technology advances. Mobile and on-demand content is being consumed not only by younger generations, but by people in all age groups. Consumption of online video content on user-generated content platforms like YouTube and Vimeo has increased 100 percent in the past five years.5 Now, nearly all adult Internet users under the age of 50 and nearly half of those over age 50 watch content online.6 Among cell phone owners, 41 percent use their phones to watch videos and 40 percent use their phones to record videos.7 These figures demonstrate the growing popularity of online video viewing on multiple platforms and the shift in the viewing experience from a passive pastime to a more interactive social experience.

As consumer preferences for personalized portable content evolve, companies in a range of industries have developed a variety of content delivery systems to meet the demand. Companies offering Internet services for user-generated content, such as YouTube and Vimeo, have ready-made viewing platforms for Internet streaming and downloading services. These platforms have provided an easy stepping-stone for more professional-based content distribution, as evidenced by YouTube’s paid subscription channels.8 Other Internet services companies have also entered the online distribution market with original programming. Amazon, which has offered video streaming since 2006, released its first original programming in late 2013.

Likewise, home-market distribution companies have made the natural transition into online digital streaming services. Distributors like Netflix and Redbox that originally operated in the DVD rental market found dramatic growth opportunities in the direct online streaming of programs. Because of the uncertainty of the licensing market and the revenue and legal challenges presented by negotiating deals for streaming third-party content, these businesses began developing original content, viewing it as a more reliable way to build a subscriber base and increase revenues.

Cable service companies, with the advantage of their fiber optic infrastructures, have also entered the online distribution market. No longer content with providing the infrastructural cable platform for content delivery and facing the same licensing pressures as DVD distribution companies, cable companies, like Comcast and Verizon, are now offering digital video on-demand services and original content on proprietary channels.

Finally, networks have ventured into the online distribution space and expanded the traditional broadcast and cable network market. As the predominant content owners in the industry, the top media conglomerates have delved into online distribution through Internet services such as Hulu, and through proprietary website and mobile app portals (access to which typically is tied to a cable subscription or for a fee) to view dedicated content.

The transformations in digital distribution and consumer preferences have driven a shift in business models for monetizing content as well. In addition to pay-per-view, online distributors offer subscription-based and “freemium” services. As advances in digital technology lower production costs and barriers to entry, more offerings can be made to a broader base of people. It is now more affordable to develop niche content markets with a more decentralized distribution model where user-generated content is offered alongside Hollywood studio releases.

Distribution markets have undergone dramatic changes. The increase in consumption of online viewing has contributed to changes in both the order and the timing of film and television distribution. Until very recently, content distribution in the entertainment industries was an ordered chain, with each distribution channel having a designated release window, which guaranteed content owners a relatively long-term revenue stream. In movies, the distribution chain began with the theatrical release of a film in domestic movie theaters and then in international theatrical markets. After theatrical runs, studios would license the content for home viewing distribution (DVD or videotape sales and rentals). Finally content would be licensed for television viewing, with cable television premium channels, like HBO and Showtime, usually getting first dibs and broadcast television taking up the rear. Content release window schedules are now much more compressed and, increasingly, studios are releasing content simultaneously across multiple distribution channels.

Copyright Infringement

Copyright infringement litigation is a defining influence over the evolving online distribution market. Since the emergence of the Internet, there has been a natural fault line between Internet service providers and content owners, marking the divide of inherent tensions between innovation and content protection. With media convergence to online platforms, contentious fights have erupted over legal rights in an effort to protect copyright interests and to secure market share. Now with the wide range of industry players entering the online distribution market, the stakes are higher and the implications much less clear. The application of legal standards in uncharted digital territory is further complicated by novel business practices and innovative platforms in the emerging online distribution markets.

Notwithstanding the pressures for doctrinal change, the fundamental purpose of copyright laws in the United States remains the same: “To promote the Progress of Science and useful Arts.”9 The principal policy objective of the Copyright Act in granting ownership interests in works of authorship is to incentivize innovation and knowledge dissemination. However, if copyright protections too heavily favor copyright owners, rights enforcement has the opposite effect of discouraging innovation. The U.S. Supreme Court recognized this tension in Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd.: “The more artistic protection is favored, the more technological innovation may be discouraged; the administration of copyright law is an exercise in managing the tradeoff.”10

In an environment of fast-paced changes accompanying media convergence, the challenges in striking this balance are compounded by the ambiguities and conflicts in legal standards for copyright infringement and secondary liability as applied in the digital context. The evolution of copyright law to adapt to the online environment has been particularly challenging.

In many instances, the courts simply do not have a statutory basis to render a decision. In one recent example, WNET v. Aereo, Inc., broadcasters sued Aereo for its unauthorized digital transmissions of broadcast programming it captured using several boards of small antennae.11 The court denied a preliminary injunction on the grounds that the technology used by Aereo to capture the transmissions produced copies unique to each Aereo service subscriber and consequently did not fall within the definition of “public performance” as defined by the Copyright Act.12 In this case, the ability to have technology that functions in a way not contemplated by the original statutory drafters means that it falls outside the scope of the defined statutory language.

In other circumstances, statutory history and judicial precedent lend little guidance to interpreting existing copyright law to new digital environments, such as whether copying an image constitutes an infringement when used for search engine purposes. In Perfect 10, Inc. v. Amazon.com, Inc., a consolidated case of claims against Amazon and Google, Perfect 10 was denied a preliminary injunction against Google for displaying allegedly infringing thumbnail images and in-line linking to full-sized images of Perfect 10’s copyrighted photographs.13 While the court found that the in-line linking of full-sized images did not constitute copyright infringement, the thumbnail images could be infringing. After conducting a fair use analysis, the court ruled that even if the thumbnail images were infringing, their use would constitute a fair use because Google transformed the images into pointers to information as part of its Google Image Search functionality. In such cases, the doctrinal building blocks are available but must be applied in new ways to address evolving technology.

Secondary Liability

While there continue to be deep-seated challenges over what constitutes direct copyright infringement in digital online environments, the challenges in navigating secondary copyright infringement liability have proven to be even more nettlesome. It has been nearly a decade since the Supreme Court weighed in on the issue of secondary liability in Grokster. Since then, efforts to harmonize and clarify the standards for vicarious and contributory liability have resulted in a confusing series of opinions that present inconsistent approaches to evaluating secondary liability claims and defenses.

Justice Souter, writing the opinion for the Court in Grokster, set forth a simple standard for secondary liability that built upon the Court’s previous ruling in Sony Corp. of America v. Universal City Studios, Inc., “holding that one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties.”14 He continued, “We are, of course, mindful of the need to keep from trenching on regular commerce or discouraging the development of technologies with lawful and unlawful potential.”15 The Court maintained the balance it struck previously in Sony, providing a broad exemption from liability for technology that has the ability to be used for noninfringing purposes while finding liability where the technology is used to induce infringement.

Statutory safe harbor provisions designed to prevent a dampening of technological innovations were intended to keep the balance between innovation and copyright ownership interests. For instance, the Online Copyright Infringement Liability Limitation Act amended the Copyright Act to provide a safe harbor provision for service providers. Section 512(c) grants immunity to service providers for user-generated content only when the service provider has no actual knowledge of infringement (“actual knowledge”); is not aware of facts or circumstances from which infringing activity is apparent (“red flag”); or, upon receiving knowledge of infringing activity, acts expeditiously to remove or disable access to the material.16 It also provides immunity to a service provider that does not receive a financial benefit from the infringing activity where the service provider has the right and ability to control such activity.17

While courts have tended to weigh in favor of a broad application of the immunity offered by the safe harbor provisions, the case law interpreting the statutory language does not offer clear guidance on when a service provider’s conduct would fall outside of the safe harbor protection. For example, in UMG Recordings, Inc. v. Shelter Capital Partners LLC, the Ninth Circuit Court of Appeals determined that the video hosting service Veoh Networks was not liable for unauthorized posting of music videos on its site because it did not have actual knowledge of the specific infringing activity.18 It held “that Veoh’s general knowledge that it hosted copyrightable material and that its services could be used for infringement is insufficient to constitute a red flag.”19 Thus, the Ninth Circuit appears to equate the “red flag” safe harbor with the “actual knowledge” safe harbor.

In contrast, the Second Circuit Court of Appeals, in Viacom International, Inc. v. YouTube, Inc., draws a distinction between the “actual knowledge” safe harbor and the “red flag” safe harbor:

The difference between actual and red flag knowledge is thus not between specific and generalized knowledge, but instead between a subjective and an objective standard. In other words, the actual knowledge provision turns on whether the provider actually or “subjectively” knew of specific infringement, while the red flag provision turns on whether the provider was subjectively aware of facts that would have made the specific infringement “objectively” obvious to a reasonable person.20

Based on this reasoning, the court determined that a finding of immunity under the safe harbor provision for YouTube’s hosting of unauthorized video content was premature because of material issues of fact regarding YouTube’s knowledge.21 Astoundingly, the court put aside a factual evaluation of the service provider’s knowledge and distinguished the actual and red flag safe harbor provisions by introducing a subjective/objective legal analysis—further confounding any effort by practitioners to derive clarity on the scope of safe harbor protection in cases of secondary liability.

The different approaches in applying secondary liability in the online context can be illustrated by the different outcomes in Perfect 10 v. Amazon and Perfect 10 v. Visa International, two cases that were decided by the Ninth Circuit within a few months of each other. In Perfect 10 v. Amazon, the consolidated case against Amazon and Google, the court ruled that “one who, with knowledge of the infringing activity, induces, causes or materially contributes to the infringing conduct of another, may be held liable as a ‘contributory’ infringer.”22 Further refining this test in the online context, the court held “that a computer system operator can be held contributorily liable if it ‘has actual knowledge that specific infringing material is available using its system,’ and can ‘take simple measures to prevent further damage’ to copyrighted works, yet continues to provide access to infringing works.”23 The court, only reviewing the issue in the claim against Google, determined that Google could have been liable for contributory infringement if it knew that the images were infringing, and remanded the case for further fact-finding.

Conversely, in Perfect 10 v. Visa International, under the same general test for contributory infringement, the court determined that Visa was not liable for contributory infringement because credit card companies could not be construed to materially contribute to the infringement.24 The court refrained from applying the test set forth in Perfect 10 v. Amazon above on the basis that search engines and payment systems cannot be equated for purposes of evaluating contributory infringement.25 The difference in treatment between the two cases raises the question of where to draw the line for which online activities constitute a material contribution. For example, does an online advertiser who places ads and generates revenue for a website that offers downloads of infringing content contributorily infringe upon a publisher’s copyrighted materials?26

Other factors in the contributory infringement analysis such as what constitutes “simple measures to prevent further damage to copyrighted works,” also leave much room for interpretation.27 When navigating these issues to assess legal risk, these benchmarks do not go far enough to provide sufficient guidance for whether a service provider is crossing the line.

While these gaps in interpretive guidance create uncertainty in evaluating potential legal risk in new market scenarios, the fact that the courts seem to construe the safe harbor provisions broadly in favor of service providers suggests that the courts are endeavoring to create a balance between innovation and copyright owner interests. Although inducement of infringement and other actionable forms of secondary liability merit adequate court enforcement, care must be taken to ensure that the ambiguity arising from conflicting interpretations in the application of the laws does not create a chilling effect on legitimate business activity and noninfringing content, including content that legitimately relies on fair use.

Impact on Media Convergence

Because developments in media convergence are outpacing the law, it is difficult to arrive at a system of clear and consistent court interpretations on copyright infringement occurring on digital platforms. Transformed distribution markets and production of original programming by content distributors have resulted in companies integrating independent third-party content and company-controlled content on the same content distribution platforms. While the current cases all stem from user-generated or user-controlled content, the analysis conflicts raise the question of whether and to what extent online distributors, such as YouTube, will be required to limit input or control over third-party content to remain immune from liability. As online distributors continue to combine the roles of Internet service provider and content producer, the applicability of safe harbor provisions has been called into question. Without consistent legal interpretations, it is only a question of time before the firewall between service provider–controlled content and user-generated content disintegrates. Unless these rules are reviewed in the context of current market conditions, the efficacy of safe harbor provisions may become severely limited and consequently increase the risk of liability for service providers, thereby stifling technological innovations and economic growth.

The uncertainties arising from uneven application of infringement and secondary liability doctrines is likely to impact the evolution of new, interconnected business models disproportionately to the traditional entertainment industry model, where distributors only distribute exclusively owned content. In nonlinear, user-driven online business models, it is foreseeable that content controlled by a service provider would be available alongside user-generated content. The troubling implications for media convergence under the secondary liability doctrine is the imprecise notion of control and when it triggers a duty to monitor or to identify and remove infringing content from a digital platform.

This lack of clear legal guidelines creates an opening for an infringement action if there is any doubt, and can potentially subject legitimate businesses to unwarranted costly lawsuits. Until greater clarity is achieved in the application of copyright infringement and secondary liability to online content, the uncertainty of liability exposure is likely to have a substantial negative impact on development and growth rates in digital content distribution in the entertainment industries. Further, while larger players can withstand costly and protracted litigation (Viacom v. YouTube was originally filed in 2007—it is currently pending appeal), independent and smaller-scale producers do not have the same ability to do so, and therefore are disproportionately affected by forced content withdrawal in the face of infringement actions.

Conclusion

The legal system’s ability to keep pace with market transformations and to establish clear standards and consistent interpretations will significantly influence the industry’s growth and trajectory. The outcomes of copyright infringement and secondary liability actions define whether distribution business models fall within the confines of acceptable copyright practices and establish who has control of the market. The extent of legal liability that companies sustain will impact how much risk exposure they are willing to absorb and consequently their level of investment in new business models.

Legal developments in cases pursuing service provider liability will have a significant impact on the development of innovative digital distribution platforms. While Netflix, Amazon, Google, and many other technology companies in the digital content media market continue to develop innovative technologies and business models to meet the demands of a voracious mobile consumer, the legal landscape has not kept pace. With the rapid development of mobile technologies and evolution of consumer preferences, these personalized portable platform technologies will be the dominant distribution market within the next five years. Legal developments will also influence whether the content available in the market either remains predominantly content owned by media conglomerates or expands to include more diversified content sources.

The need to develop a uniform, systemic approach and to resolve the interpretive conflicts and ambiguities in the law is imperative. In the pursuit of individual case outcomes to zealously represent clients, it is far too easy for advocates to lose sight of the broader market implications of legal uncertainty in a burgeoning market and the long-run costs to the public and technological innovation. Clear legal guideposts framed in the context of media convergence will drive constructive and consistent solutions to meet the challenges to owners’ rights arising from technological innovation and increased consumer demand, and ensure a successful digital content revolution.

Endnotes

1. Timothy Stenovec, Netflix Overtakes HBO in Paid U.S. Subscribers, HuffPost Tech (Oct. 21, 2013), http://www.huffingtonpost.com/2013/10/21/netflix-hbo_n_4138477.html; see also Richard Lawler, Netflix Tops 40 Million Customers Total, More Paid US Subscribers than HBO, Engadget (Oct. 21, 2013), http://www.engadget.com/2013/10/21/netflix-q3-40-million-total/; Brian Stelter, Netflix Hits Milestone and Raises Its Sights, N.Y. Times, Oct. 21, 2013, http://www.nytimes.com/2013/10/22/business/media/netflix-hits-subscriber-milestone-as-shares-soar.html.

2. Netflix Wins Three Emmys, “House of Cards” Shut Out of Major Categories, HuffPost TV (Sept. 23, 2013), http://www.huffingtonpost.com/2013/09/22/netflix-emmys-house-of-cards-wins_n_3973794.html; see also John Weisman, Emmy Nominations Announced: “House of Cards” Makes History, Variety (July 18, 2013), http://variety.com/2013/tv/news/emmy-nominees-2013-emmys-awards-nominations-full-list-1200564301/.

3. See Rob Pegoraro, FCC Chairman’s Open-Access Plan, Wash. Post Faster Forward (July 23, 2007), http://voices.washingtonpost.com/fasterforward/2007/07/a_new_deal_for_wireless_data.html.

4. See Open Internet, FCC, http://www.fcc.gov/openinternet#rules (last visited Mar. 2, 2014). But see Verizon v. FCC, 740 F.3d 623 (D.C.C. 2014).

5. Kristin Purcell, Assoc. Dir. for Research, Pew Internet Project, Online Video 2013, at 8 (2013), available at http://www.pewinternet.org/files/old-media//Files/Reports/2013/PIP_Online%20Video%202013.pdf.

6. Id. at 6.

7. Id. at 16.

8. Amir Efrati, YouTube Unveils Paid Subscription Channels, Wall St. J., May 9, 2013, http://online.wsj.com/news/articles/SB10001424127887324744104578473230854933060.

9. U.S. Const. art. I, § 8, cl. 8.

10. 545 U.S. 913, 928 (2005).

11. 712 F.3d 676 (2d Cir. 2013), cert. granted, Am. Broad. Cos. v. Aereo, Inc., 134 S. Ct. 896 (2014).

12. Id. at 696.

13. 508 F.3d 1146 (9th Cir. 2007).

14. Grokster, 545 U.S. at 936–37; see Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417 (1984).

15. Grokster, 545 U.S. at 937.

16. 17 U.S.C. § 512(c)(1)(A).

17. Id. § 512(c)(1)(B).

18. 718 F.3d 1006 (9th Cir. 2013).

19. Id. at 1023.

20. 676 F.3d 19, 31 (2d Cir. 2012).

21. Id. at 32.

22. Perfect 10, Inc. v. Amazon.com, Inc., 508 F.3d 1146, 1171 (9th Cir. 2007) (quoting Gershwin Publ’g Corp. v. Columbia Artists Mgmt., Inc., 443 F.2d 1159, 1162 (2d Cir. 1971)).

23. Id. at 1172 (citations omitted) (quoting A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1022 (9th Cir. 2001); Religious Tech. Ctr. v. Netcom On-Line Commc’n Servs., Inc., 907 F. Supp. 1361, 1375 (N.D. Cal. 1995)).

24. Perfect 10, Inc. v. Visa Int’l Serv. Ass’n, 494 F.3d 788, 796 (9th Cir. 2007) (Kozinski, J., dissenting).

25. Id. at 797.

26. See Elsevier Ltd. v. Chitika, Inc., 826 F. Supp. 2d 398 (D. Mass. 2011) (holding that defendant online advertiser did not materially contribute to infringement of publisher’s copyrighted works).

27. Perfect 10 v. Amazon, 508 F.3d at 1172.

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