Perfect 10 Inc. should be making buckets of money from its adult Web site. Thousands of people are forking out $19.99 a month to see Perfect 10′s racy videos and photos.

Unfortunately, most of this money is going to Web sites that have made unauthorized copies of the company’s images. These sites put Perfect 10′s works on their own Web sites and charge people money to engage in a little online voyeurism–not a dime of which gets passed on to Perfect 10, the owner of the works.

The company has spent years and millions of dollars suing these infringing sites, but the company has little to show for its efforts. The sites are either hosted in foreign countries, where a U.S. court judgment can’t be enforced, or the sites’ owners can’t be located because they registered the sites under phony names and addresses. In short, Perfect 10 has come up empty.

So the company is trying a new tack. It’s suing two deep-pocket defendants located in the United States: MasterCard and Visa. Perfect 10 alleges these companies, which process the online credit card transactions for the infringing sites, are liable for vicarious copyright infringement.

“If the courts were to find the credit card companies liable, it would be a massive extension of copyright liability,” warns Jessica Litman, a professor at Wayne State University Law School and author of “Digital Copyright,” a book on copyright law and the Internet. If Perfect 10′s theory succeeds, companies could be held liable because of their commercial ties with infringers, even if the companies didn’t know they were dealing with infringers.

“This is an absolutely novel and dangerous theory,” says Andrew Bridges, who represents MasterCard in the suit. “If the suit were successful, it would have the effect of seriously curtailing Internet commerce–and a whole range of commercial activities.”

Elusive Enemies

Perfect 10 filed suit against MasterCard and Visa Jan. 28, 2004, alleging the two companies provided “crucial transactional support services” to the infringing Web sites, thus allowing them to stay in business. In other words, Perfect 10 argued the companies should be liable because they processed the credit card payments from the Web sites’ customers to the infringing sites. These payments were a major part of the sites’ earnings.

What’s more, Perfect 10 argues, is the credit card companies knew they were working with sites that were committing copyright infringement. Starting in January 2003, Perfect 10 sent letters to in-house counsel at MasterCard and Visa, informing them that 240 users of their services were selling infringing photos and movies online. Nevertheless, the credit card companies continued to do business with these sites, according to Howard King, the partner at King, Holmes, Paterno & Berliner who represents Perfect 10 in the litigation.

But Bridges, a partner at Winston & Strawn’s San Francisco office, says there’s a good reason why MasterCard and Visa didn’t end their relationship with the infringing sites: “Credit card providers are not in the business of adjudicating infringement claims.”

More to the point, Bridges maintains, MasterCard and Visa merely were providing financial services to the sites, and these services weren’t part of any infringement. Whatever services the credit card companies provided were too far removed from the actual infringing activities to hold these financial institutions liable, he says.

Perfect 10 disputes this, alleging the credit card companies were heavily involved in the infringement. “Visa and MasterCard inspected the [infringing] Web sites and the merchants, [which ran the sites],” King says. “Their agreements with the merchants gave them the power to edit the content on these Web sites.” He adds that the agreements “have several other specific requirements that give them some actual control over the businesses [of the Web sites].”

The federal district court in San Jose, Calif., disagreed. On Nov. 15, 2004, Judge James Ware threw out Perfect 10′s copyright claims against MasterCard and Visa, finding that the company had failed to allege any facts indicating that the financial services the credit card companies provide were related to the infringing activities of the Web sites.

Perfect 10 isn’t giving up, however. The company is appealing the ruling in Perfect 10, Inc. v Visa International Service Association, to the 9th Circuit. And IP attorneys across the nation are watching closely.

From Napster to FedEx

To support its position, Perfect 10 points to prior decisions in which courts have held defendants liable for vicarious copyright infringement because they provided crucial support to infringers. The major case it is relying on is its own prior court victory, Perfect 10, Inc. v. Cybernet Ventures, Inc. In that case, the court issued an injunction against a company that verifies the ages of visitors to the infringing sites.

But there are other cases too, where a company was found liable for providing crucial support to infringers. For instance, record companies successfully sued a swap-meet operator in Marysville, Calif., in 2004. The operator, Richard Sinnott, was held liable for secondary infringement because he knew that some of his customers were using the meet to sell infringing records.

In another more famous case, A&M Records v. Napster, the court held Napster liable to the major record companies because its customers were using the company’s services to exchange unauthorized copies of songs online.

In both cases, the defendants’ activities directly aided the infringement. The swap-meet operator ran the marketplace that allowed the infringing sales to occur; and Napster’s users relied on the company’s software and servers to find and download infringing copies of songs.

On the other hand, MasterCard and Visa were at least one step removed from the infringing activities, providing services that helped the business operations of infringing sites, but not directly helping the infringements to occur. And that’s why some copyright experts think Perfect 10 is stretching copyright law too far.

“Making these credit card companies liable would be completely unprecedented,” says Jonathan Band, an Internet law expert at Morrison & Foerster. “If someone that far removed from the infringing activity were to be held liable, then everyone would be liable. Federal Express would be liable because it delivers packages to infringers. Utility companies would be liable because they provide electricity to infringers. There would be no end to liability.”

Less Than Perfect

Litman agrees with Band’s assessment and believes Judge Ware’s ruling was good public policy.

“Vicarious liability needs to be fairly circumscribed or everybody will be held liable for materially contributing to everyone else’s infringement,” Litman explains. “In a statute that makes people liable for innocent infringement, widely expanding the scope of liability makes no sense.”

King dismisses this analysis, insisting that the credit card companies were indeed involved in overseeing the creation and operation of infringing sites.

“We disagree [with Judge Ware] over what level of involvement in a customer’s business rises to the requisite ‘supervision and control’ to impose secondary liability for infringement,” he says.

Few observers expect Perfect 10 to win its appeal before the 9th Circuit, but the company is persistent. It recently took aim at another deep-pocket defendant.

On Nov. 19, 2004, Perfect 10 filed suit against Google for copyright infringement. The suit alleges, among other things, that Google allows users to find and view infringing photos originating from infringing Web sites. Google has denied that its actions violate the copyright law. But that, apparently, will be for the courts to decide.