Porn Site Loses High Stakes

Internet porn sites, when they appear on a court docket, are usually defending themselves against individuals or regulators. Perfect 10, by contrast, is the perfect exception.

In the past few years the soft-porn site, which sells copyrighted images of "natural" nude models, has been the plaintiff in three important 9th Circuit cases that are shaping online copyright law.

Perfect 10 could claim at least a partial victory in its first two suits, against Google and CCBill, an online payment processing service. In each case the 9th Circuit reversed district courts' summary dismissals of Perfect 10's claims for contributory copyright infringement and sent a number of issues back to the district court.

But then Perfect 10 decided to take on an even bigger fish. The company had alleged in all three suits that numerous international Web sites had stolen its proprietary images, altered them and illegally offered them for sale. But instead of suing the direct infringers, Perfect 10 sued third parties.

In Perfect 10 v. Visa, the most recent decision, the company sued five financial institutions, including Visa International Service Association and MasterCard International Inc., all of whom processed credit card payments to the allegedly infringing Web sites. Perfect 10 alleged that providing this service attracted secondary liability for copyright infringement because the processors materially contributed to the infringing activities.

The defendants moved to dismiss and succeeded in the district court. Perfect 10 appealed to the 9th Circuit, but on July 3, a divided court upheld the dismissal.

"The ruling is a pro-commerce, pro-Internet decision that could have slowed down commerce significantly if it had gone the other way," says Michael Atkins, an IP partner at Graham & Dunn.

Secondary Liability

Like many online secondary liability rulings, the judgments in Perfect 10 v. Visa struggle to define how much control defendants must have over infringers to attract secondary liability.

Professor Eric Goldman, director of the High-Tech Law Institute at the Santa Clara University School of Law, says the debate is one of principle.

"Both the majority and the minority agree that financial service providers [FSPs] are simply a factor of production for businesses that could be legitimate or illegitimate," he says. "But they disagree on the significance of that input."

The majority's philosophy appears early in the judgment.

"We evaluate Perfect 10's claims with an awareness that credit cards serve as the primary engine of electronic commerce and that Congress has determined it to be the 'policy of the United States--(1) to promote the continued development of the Internet [and related services and] (2) to preserve the vibrant and competitive free market that presently exists for the Internet [and related services]'," the two majority judges stated.

On this basis the majority concluded that the credit card companies had neither materially contributed to nor induced the infringing behavior, as they had not used their systems to locate, transmit, alter or display the copyrighted works or direct cardholders toward the infringing sites.

"The majority drew a distinction between controlling the instrumentality of the infringement and the instrumentality of paying for it," Atkins says.

For his part, the dissenting judge saw the payment services as integral to the infringers' operations.

"While the majority sees FSPs like power companies--behind the scenes vendors that don't touch the flow of infringing bits--the minority thinks FSPs are no different than bagmen for an illegal deal who should take responsibility for it," Goldman says.

In the end the debate boiled down to whether FSPs should be gatekeepers. The majority said they should not, while the minority noted that FSPs have rules for prohibiting certain illegal activities and they already invest enormous resources in policing their enforcement network.

"Requiring defendants to abide by their own rules, which 'strictly prohibit members from servicing illegal businesses,' will hardly impair the operation of a 'vibrant and competitive free market,' any more than did the recent law prohibiting the use of credit cards for Internet gambling," the dissenting judge stated.

A decision against the FSPs, however, would have allowed rival Web sites to send notices of infringement to companies such as Visa and MasterCard as a way of impairing their competitors' ability to do business or even drive them out of business, which could create a significant drag on online commerce.

Which is not to say that the law is clear--at least not in the 9th Circuit.

Remaining Ambiguity

As Goldman sees it, the 9th Circuit troubles stem from early cyberlaw decisions, such as the 2001 decision in A&M Records v. Napster, which it has found difficult to reconcile with subsequent cases.

"The 9th Circuit should take a hard look at its entire body of cyberlaw if it wants to provide the type of useful guidance we expect from appellate courts," he says. "All three [Perfect 10] results were perfectly sensible, but that leaves us relying strictly on common sense to determine what the law is, which isn't very comforting."

However that may be, the uncertainty the decision in Perfect 10 creates is certainly preferable to the alternative, which may have left companies struggling to conduct business on the Web.

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Julius Melnitzer

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