On July 3, the U.S. Court of Appeals for the Ninth Circuit issued a sharply divided opinion in Perfect 10, Inc. v. Visa International Service Assoc., 1 the latest in a long series of cases addressing the potential liability of third parties for on-line copyright infringements by their users.

Unlike several other recent high-profile decisions including Napster, 2 Grokster 3 and Perfect 10 v. Amazon.com, 4 which have provided a framework for imposing secondary liability in the on-line context, the majority opinion in Visa declared that the defendants in that case could have no liability for their users’ infringements under any circumstances, and affirmed the dismissal of the plaintiff’s claims under Rule 12(b)(6).

Also unlike those earlier cases, however, the defendants in Visa were not Internet service providers or peer-to-peer services that helped users locate infringements, but credit card companies who simply allowed customers to use their cards to purchase infringing content. This distinction was more than enough for the majority, which categorically held that payment processing “does not constitute a ‘material contribution’ under the test for contributory infringement.” Judge Alex Kozinski was not persuaded, and said in a characteristically colorful dissent that “the credit cards are easily liable for indirect copyright infringement. They knowingly provide a financial bridge between buyers and sellers of pirated works, enabling them to consummate infringing transactions, while making a profit on every sale. If such active participation in infringing conduct does not amount to indirect infringement, it’s hard to imagine what would. By straining to absolve defendants of liability, the majority leaves our law in disarray.” 5 The debate within the Ninth Circuit may just be beginning, as plaintiff is seeking a rehearing en banc.

Majority Opinion

Perfect 10 publishes an adult magazine and operates a subscription-only Web site featuring “tasteful copyrighted images of the world’s most beautiful natural models.” As early as 2003, rogue Web sites based in various countries began offering copyrighted Perfect 10 images for sale without authorization. Defendants Visa International, MasterCard International and others process credit card transactions for some of these Web sites. Perfect 10 sent repeated notices to the credit card defendants, specifically identifying infringing Web sites and informing defendants that their customers were using the defendants’ cards to purchase infringing images. The defendants admitted receiving the notices, but took no action.

In January 2004, Perfect 10 brought an action in the U.S. District Court for the Northern District of California alleging inter alia that the defendants were liable for vicarious and/or contributory copyright infringement. The district court granted a motion to dismiss all claims under Rule 12(b)(6). Perfect 10 appealed.

The Ninth Circuit majority affirmed. In an opinion by Judge Miland D. Smith Jr., the court began its analysis by acknowledging “an awareness that credit cards serve as the primary engine of electronic commerce” and noting that Congress has expressly stated a policy to facilitate and promote the development of the Internet and other interactive media. The court then turned to the substance of the claims for contributory infringement and vicarious liability.

Contributory infringement requires a showing that defendant had actual or constructive knowledge of the infringing activity and made some “material contribution” to it; because the majority found no material contribution it did not address the knowledge element. The majority’s reasoning on the second element basically ran as follows:

First, the credit cards do not make a “material contribution” to the users’ infringements because they do not help users locate infringements, as did the services in Napster et al., but rather they merely help users pay for the infringements they find. Unlike Google, which was faced with potential liability under Perfect 10 v. Amazon.com, the defendants here do not themselves materially assist in the distribution of infringing content to Internet users: “[H]elping users to locate an image might substantially assist users to download infringing images, but processing payments does not.” 6 The primary distinction offered by the majority is that with the credit cards, there is “an additional step in the causal chain” which renders the credit cards less material to users’ infringements than location aids such as Napster and Google: “Because location services lead Internet users directly to infringing images, and often display them on the Web site of the service itself, we find that location services are more important and more essential – indeed, more ‘material’ – to infringement than payment services are.” 7

Second, the majority noted that

[i]f users couldn’t pay for images with credit cards, infringement could continue on a large scale because other viable funding mechanisms are available. For example, a Web site might decide to allow users to download some images for free and to make its profits from advertising, or it might develop other payment mechanisms that do not depend on the credit card companies. In either case, the unlicensed use of Perfect 10′s copyrighted images would still be infringement. 8


In the alternative, the majority observed that even without any payment mechanism at all, infringement would not disappear.

Third, the majority declined to embrace a rule that might “include a number of peripherally involved third parties, such as computer display companies, storage device companies, and software companies that make the software necessary to alter and view the pictures and even utility companies that provide electricity to the Internet.” 9

Fourth, the majority took pains to distinguish the credit card defendants from the defendant in Fonovisa v. Cherry Auction, 10 a leading pre-Internet decision on secondary liability in the Ninth Circuit. In Fonovisa, the court found contributory infringement by a company that operated flea markets at which infringing tapes and CDs were sold, on the theory that its “site and facilities” (such as parking, utilities, sanitation, and advertising) created a commercial environment in which “massive quantities” of infringement could occur. For the majority, the credit card defendants in Visa “do no such thing,” and their payment systems are in no way analogous to the “site and facilities” in Fonovisa.

The majority also found no basis for imposing vicarious liability, which requires a showing of financial benefit coupled with a right and ability to supervise or control the infringing conduct. Here, the majority found that no possible set of facts could support a finding as to the “control” element, because the defendants

cannot themselves block access to the Internet, to any particular Web sites, or to search engines enabling the location of such Web sites. Defendants are involved with the payment resulting from violations of the distribution right, but have no direct role in the actual reproduction, alteration, or distribution of the infringing images. They cannot take away the tools the offending Web sites use to reproduce, alter, and distribute the infringing images over the Internet. They can only take away the means the Web sites currently use to sell them. 11


Plaintiff argued that sufficient control could be established because the defendants’ own contracts with the infringing sites allow them to discontinue processing payments if the sites engage in illegal activity. The majority did not agree:

In the sense that economic considerations can influence behavior, these contractual rules and regulations do give Defendants some measure of control over the offending Web sites since it is reasonable to believe that fear of losing access to credit card payment processing services would be a sufficient incentive for at least some Web site operators to comply with a content-based suggestion from defendants. But the ability to exert financial pressure does not give defendants the right or ability to control the actual infringing activity at issue in this case. Defendants have no absolute right to stop that activity – they cannot stop Web sites from reproducing, altering, or distributing infringing images. 12


Judge Kozinski’s Dissent

Judge Alex Kozinski dissented strenuously, in the trenchant prose for which he is well-known and to which paraphrase cannot do justice. We therefore set forth some of the central points of his dissent, in his own heavily abridged words (many footnotes and citations omitted):

Plaintiff has repeatedly notified defendants that they are abetting the sale of stolen merchandise by “knowingly providing crucial transactional support services for the sale of millions of stolen photos and film clips worth billions of dollars,” but to no avail. Frustrated in its effort to protect the rights Congress has given it, plaintiff turns to the federal courts for redress. We should not slam the courthouse door in its face. Accepting the truth of plaintiff’s allegations, as we must on a motion to dismiss, the credit cards are easily liable for indirect copyright infringement. 13


On the distinction between location services and payment services:

Our recent opinion in Perfect 10, Inc. v. Amazon.com, Inc. canvasses the case law in this area and concludes that Google “could be held contributorily liable if it had knowledge that infringing Perfect 10 images were available using its search engine, could take simple measures to prevent further damage to Perfect 10′s copyrighted works, and failed to take such steps.” Substitute “payment systems” for “search engine” in this sentence, and it describes defendants here . . . . Location services and payment services are equally central to infringement; the majority’s contrary assertion is supported largely by disparaging use of “merely,” “simply” and “only.” 14


On the relative materiality of location services and payment services:

The majority argues that “[b]ecause location services lead Internet users directly to infringing images, and often display them on the Web site of the service itself, we find that location services are more important and more essential – indeed, more ‘material’ – to infringement than payment services are.” Skipping lightly over the fact that we lack the power to “find” anything, the majority admits that payment services are important, essential and material. That location services may – or may not – be more so, is of no consequence; this is not a race where there can be only one winner. 15

. . . .

If it mattered whether search engines or credit cards are more important to peddling infringing content on the Internet, the cards would win hands down. But it doesn’t matter. 16


On the availability of other payment mechanisms:

Defendants have presented no evidence that the pirates could survive without credit cards, nor could they, as the case is still at the motion to dismiss stage. Even if speculation as to what the [infringing] [W]eb sites “might” do were admissible evidence, which I seriously doubt, we must still wait for one of the parties to present it, not conjure it up ourselves . . . . If my colleagues can’t justify their result without contradicting plaintiff’s allegations, this is a pretty good hint that they’re wrong. 17


On the majority’s reading of Fonovisa:

Nor can today’s opinion be squared with Fonovisa . . . . The pivotal role played by the swap meet in Fonovisa is played by the credit cards in cyberspace, in that they make “massive quantities” of infringement possible that would otherwise be impossible . . . . [M]aterial assistance does not depend on physical contact with the infringing activity. If you lend money to a drug dealer knowing he will use it to finance a drug deal, you materially assist the transaction, even if you never see the drugs. Or, if you knowingly drive a principal to the scene of the crime, you provide material assistance, even if nothing happens during the ride. 18


On the slippery slope:

The majority’s concern that imposing liability on defendants here would implicate vast numbers of other actors who provide incidental services to infringers is unfounded . . . . Were we to rule for plaintiff, as we should, I have every confidence that future courts would be able to distinguish this case when and if they are confronted with lawsuits against utility companies, software vendors and others who provide incidental services to infringers. 19


On vicarious liability:

[T]he cards have the authority, given to them by contract, to force the [infringing] [W]ebsites to remove infringing images from their inventory as a condition for using defendants’ payment systems . . . . [W]e have never required an “absolute right to stop [the infringing] activity” as a predicate for vicarious liability; it’s enough if defendants have the “practical ability” to do so. Amazon, slip op. at 5794, 5796. While proclaiming its fidelity to Amazon, the majority jettisons Amazon‘s “practical ability” standard and substitutes its own “absolute right to stop” standard . . . . A threat by credit card companies to withdraw use of their payment systems couldn’t be ignored. After all, how many consumers would be willing to send a check or money order to a far-off jurisdiction in the hope that days or weeks later they will be allowed to download some saucy pictures? 20


On public policy:

The majority’s refrain that imposing liability on defendants here would violate “the public policy of the United States,” is equally off base. While the majority correctly identifies that policy as facilitating the development of electronic commerce, that solicitude does not extend to commerce in illegal merchandise. I am aware of no policy of the United States to encourage electronic commerce in stolen goods, illegal drugs or child pornography. When it comes to traffic in material that violates the Copyright Act, the policy of the United States is embedded in the FBI warning we see at the start of every lawfully purchased or rented video: Infringers are to be stopped and prosecuted. Preventing financial intermediaries from servicing such shady transactions is entirely consistent with that policy. 21


In conclusion:

This is an easy case, squarely controlled by our precedent in all material respects. Fairly applying our cases to the facts alleged by Perfect 10, we should reverse the district court and give plaintiff an opportunity to prove its case through discovery and trial. In straining to escape the strictures of our case law, the majority draws a series of ephemeral distinctions that are neither required nor permitted; the opinion will prove to be no end of trouble. 22


Conclusion

As Judge Kozinski’s forceful dissent makes clear, the majority’s decision could mark a significant shift in the Ninth Circuit’s law of secondary copyright liability. Whether such a step should be taken on a 12(b)(6) motion without an evidentiary record is a question which could well draw the scrutiny of an en banc panel. Much more is at stake than “some saucy pictures.”

Robert W. Clarida is a partner at Cowan, Liebowitz & Latman and is the coauthor of “Recent Developments in Copyright,” a review of decisions delivered at the annual meeting of the Copyright Society of the U.S.A. Robert J. Bernstein practices law in The Law Office of Robert J. Bernstein and is a past president of the Copyright Society of the U.S.A. (c) 2007 Cowan, Liebowitz & Latman and Robert Jay Bernstein.

Endnotes:

1. No. 05-15170, 2007 WL 1892885 (9th Cir. July 3, 2007).

2. A&M Records, Inc. v. Napster, Inc., 239 F3d 1004 (9th Cir. 2001).

3. Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Inc., 545 US 913 (2005).

4. 2007 WL 1428632 (9th Cir. May 16, 2007) (pet. for en banc review pending).

5. Visa at *16.

6. Id. at *5.

7. Id. at n.8.

8. Id. at *5.

9. Id. at *7.

10. 76 F3d 259 (9th Cir. 1996).

11. Visa at *11.

12. Id.

13. Id. at *16.

14. Id. at *16-*17.

15. Id. at *17 n.6.

16. Id. at *19.

17. Id. at *18.

18. Id. at *19-*20.

19. Id. at *20-*21.

20. Id. at *21-*22.

21. Id. at *26.

22. Id. at *27.