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The Tube and You: Why Insurers Are Watching YouTube

By Timothy D. Kevane, special counsel, Sedgwick LLP

A driver's education of sorts for transgressors, YouTube's "Copyright School" will require them to watch a video and pass a quiz on copyright. The effort is unlikely to appease content owners such as Viacom International, the media conglomerate battling Google in a landmark copyright infringement case.

At stake is the interpretation of the "safe harbor," a critical defense to digital copyright infringement claims, and the continued viability of major players on the internet, which has now surpassed print media in ad revenue, and is second only to television.

The case may have significant coverage consequences depending on policy terms and basic insurance principles. On a more practical level, and in particular for insurers of internet-based media companies that rely on user-generated content, a redefinition of the standard could result in unparalleled exposure.

During the Internet's rapid development in the 1990s, enormous pressure was put on Congress to protect creators and their works, while giving providers some security given the nature of their services. The result was the passage of the Digital Millenium Copyright Act in 1998. The DMCA essentially prohibits digital technology used by hackers and thieves to circumvent security measures that protect copyrighted work. But the DMCA grants a "safe harbor" to service providers that host unauthorized work on their sites. The DMCA balances the interests of owners and providers who need protection from claims that might deter technological innovation and stifle freedom of expression.

Major Internet insureds such as eBay and Amazon rely on the safe harbor. But these companies risk losing that protection if: (1) they obtain "actual knowledge that the material or an infringing activity using the material on the system or network is infringing;" (2) in the absence of such actual knowledge, they are "aware of facts or circumstances from which infringing activity is apparent;" or (3) they receive a "financial benefit directly attributable to the infringing activity" and have the "right and ability to control" that activity. In any case, providers must act expeditiously upon being notified of an infringement to take down the subject material.

Enter YouTube seven years later, and with it, an unforeseen explosion in the volume of copyrighted material on the internet. In 2007, Viacom sent YouTube takedown notices for thousands of videos that took in over one billion views, and a demand to implement other measures. A few weeks later, Viacom filed a lawsuit claiming that YouTube and Google, which purchased YouTube for $1.7 billion, "actively engage in, promote and induce" copyright infringement and that they "know and intend" that a substantial amount of their content consists of unlicensed works. The videos are part of YouTube's indexed library, capable of being searched, performed and displayed in accordance with its software format. Viacom alleges that even though YouTube was aware of "rampant" infringement, it implemented an "intentional" strategy of taking no steps to curtail the offenses unless notified of specific infringing videos.

In deciding their summary judgment motions, the district court framed the issue as whether a safe harbor challenge -- based upon the mental states of "actual knowledge" and/or awareness of "facts and circumstances" -- requires a showing of only a general awareness that infringements exist, or knowledge of "specific and identifiable" works infringed.

Viacom claims YouTube had a specific knowledge and intent to infringe, citing its expressed aspiration to stand firmly in the company of Napster and Kazaa. A complaint by YouTube's internet service provider that YouTube was hosting copyrighted content was apparently met with the dismissive remark. YouTube's lead product manager allegedly acknowledged that "probably 75-80 percent of our views come from copyrighted material." Another internal email allegedly referred to avoiding the "copyright bastards." Corporate policy was allegedly reflected in defiant emails, such as "we should just keep that stuff on the site. I really don't see what will happen. What? Someone from CNN sees it? He happens to be someone with power? He gets in touch CNN legal. 2 weeks later, we get a cease and desist letter. We take the video down."

Indeed, early in its existence, YouTube apparently considered removal of its community flagging feature for copyrighted material, believing it would minimize its liability and put the burden on the owner to notify it of any infringement. Within a few months of launching, YouTube was described as the "Video Napster." Before acquiring YouTube, Google acknowledged YouTube's "liberal" copyright policy with no "proactive screening, reactive DMCA only." "Copyright, schmoppyright" remarked a Google employee.

RULING FOR YOUTUBE ON APPEAL

While the court found YouTube was "not only ... generally aware of, but welcomed copyright-infringing material" as enhancing advertising income, it granted the safe harbor defense. It found that the safe harbor is unavailable only when an owner can show the provider has actual knowledge of specific and identifiable infringements of individual items, including the particular uniform resource locator (URL). Otherwise, the service provider need only respond to a cease-and-desist demand by a copyright owner in a timely manner, even if it is already aware of pervasive copyright infringement. By extension, the financial benefit exemption from the safe harbor did not apply because YouTube could not have the "right and ability to control" infringing activities without the "item-specific" knowledge.

The case is on appeal in the Second Circuit. Viacom says the court's interpretation would "radically transform" copyright laws by immunizing "avowedly piratical Internet businesses," producing "absurd, disquieting and disruptive results." It argues the court converted the awareness exclusion of the safe harbor into a "superfluity" by requiring specific knowledge of a copyrighted work. The knowledge that foils a safe harbor defense, Viacom argues, does not hinge on receiving a takedown notice, particularly for service providers who "intentionally facilitate and profit from their users." By imposing a URL-specific knowledge requirement, Viacom says the court deprived the awareness exclusion of any independent meaning.

YouTube sees things differently. It says the safe harbor allows services like it to "flourish as platforms for creative, political, and social expression." Without a specific knowledge requirement, the safe harbor escape hatch, which protects the provider who expeditiously removes the offending material, would make no sense since the material could not be located and removed with only generalized knowledge. It thus stands to reason that in order to eliminate safe harbor protection, the plaintiff must show knowledge of specific material. YouTube suggests the issue is simply one of two standards, one subjective, applying to the knowledge exclusion; and the other objective, applying to the awareness exclusion, such that if the infringement is obvious to a "reasonable" person, the safe harbor is lost. But in either case, both apply to a specifically-identifiable work, not generalized information of infringement.

Insurance Implications

The Second Circuit will review the matter, and no doubt take note of the record, including emails like a September 2005 warning that the site was getting "out of control with copyrighted material ?." Another memo apparently acknowledged that "blatantly illegal" clips of several Viacom properties such as South Park, Daily Show and Dave Chappelle were available on YouTube. YouTube's alleged policies and actions raise challenging questions with respect to coverage. Liability insurance is generally intended to respond to loss having some element of fortuity, excluding coverage for intended or expected harms. Many states have statutes that codify the fortuity doctrine, based on longstanding public policy prohibiting insurance for intentional misconduct. In some cases, a court may view the harm caused as an inherent result of the conduct. In addition, the known loss doctrine bars insurance for a liability known to the insured before policy inception.

While copyright infringement is generally viewed as a strict liability tort, policies may also contain exclusions that preclude coverage for intentional acts, some of which specifically address "intentional" or "willful" copyright infringement, which has a scienter element of knowing or reckless infringement. Significantly, enhanced penalties apply to willful copyright infringement due to the severity of the conduct, incorporating a punitive component to discourage further wrongdoing. This reflects the finding that the defendant has acted deliberately, and that substantially more damages are a more effective sanction to stop the conduct. Willful infringement is categorically and inherently harmful, which raises coverage concerns to the extent the cause and effect are inseparable. Cases have declined coverage for intellectual property or personal torts otherwise covered by the policy in similar situations.

From an underwriting perspective, the dispute demonstrates the importance of careful review of a prospect's operations. Because of the significance of the DMCA's takedown procedures, which may sustain a safe harbor defense, a thorough assessment of those procedures is essential. Viacom asserts that YouTube's abandonment of various measures such as community flagging, digital fingerprint filtering and keyword searching undermine its safe harbor defense. An insurer will want to understand all of the risk management tools at the insured's disposition and which ones might be missing. The knowledge and skills of staff charged with keeping the insured within the safe harbor, including in-house counsel, should be carefully assessed. These factors are critical, especially given that it is only in recent years that the distinction between the knowledge and awareness exclusions has become a significantly-litigated issue -- precisely because of the technological advancements that allow service providers to obtain knowledge of an infringement. The history of claims and related disputes should be fully disclosed and evaluated, as they will provide concrete examples of the risk and the insured's ability to stay within the safe harbor. Indeed, a rescission lawsuit based on the insured's failure to fully disclose the nature of its operations, including prior receipt of DMCA takedown notices, was recently filed by an insurer.

Worth highlighting are YouTube's terms of use, which provide that it removes all content that infringes on another's intellectual property rights, and assumes editorial control over the site. YouTube appeared to consider the policy a double-edged sword, i.e., the failure to implement an established policy may be more harmful than the failure to establish one in the first instance. In a curious contradiction, a YouTube email apparently acknowledged it had "control over its users," followed by a remark several months later describing the site as "out of control." The uncertainty illustrates the importance of clearly understanding a prospect's policies and procedures.

Insureds might argue new and old media operations warrant different treatment. A print publisher generally has adequate opportunity to vet and review publications, given slow production processes and high costs. These characteristics vanished with the internet, and especially user-generated content sites, which capitalized on their absence of systems and controls for purposes of rapid growth. Nonetheless, technology has adapted, and the notion that the volume or speed of information constitute mitigating circumstances is doubtful, particularly if an insured's business model touts these features.

As far as claims, the case will provide much-needed definition to the two exclusions. An affirmance for YouTube would uphold an expansive view of the safe harbor, which would be welcome news for insurers. Insureds might suggest that their high-risk models should not implicate conduct-based coverage defenses, if they are fit enough for the safe harbor. Even if affirmed, however, a provider who loses the safe harbor protection under the knowledge exclusion might still run into coverage problems.

A loss by YouTube could also have negative consequences. As a scienter-based defense, a higher standard for applying the safe harbor could lay the foundation for coverage defenses. There is little question that the safe harbor doctrine was conceived for "innocent" insureds, and "disappears at the moment" the insured "loses its innocence." If the insured is found to have acted with knowledge sufficient to remove the safe harbor protection, is insurance protection still warranted? If the Second Circuit holds the awareness exclusion applies, it could complicate an insured's claim for coverage, as the element of fortuity is diffused. The problem is real, if courts reject the notion -- advanced by YouTube -- that the awareness exclusion requires particularized knowledge that material at a specific URL address is infringing. If the insured proceeded in disregard of generalized red flags, an argument may exist that in the same manner it drifted from the safe harbor, it may lose insurance as protection against fortuitous loss.

The potential exposure is also a major concern. In its first five years, more than 500 million videos were posted on the site, and as of 2010, more than 24 hours of new video was uploaded every minute. YouTube uploads more video content in a single month than the combined output of the three major U.S. television networks for the past 60 years. These stunning statistics have raised the stakes beyond precedent. A plaintiff may recover statutory damages equal to between $750 to $30,000 per infringed work, which may be increased to up to $150,000 for willful infringement. Online services or technology providers have been sued for billions of dollars in damages, and even trillions. An amicus brief theorized that even if only 1 percent of the roughly 110 million new videos uploaded per year was infringing, a $10,000 statutory damage penalty for each would cost YouTube $11.1 billion per year. Clearly, without DMCA protection, the potential liability of a service provider like YouTube, relying on millions of users freely exchanging content, would be unmanageable.

The YouTube case demonstrates that the DMCA did not fully achieve a balance between creators and internet service providers. As an increasing sector of the economy turns to digital services, further clarification of liability standards will be of value to insurers, providing an important resource for underwriting and claims evaluations.

September 1, 2011

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