Google’s attempt to build the world’s biggest digital library was sidetracked yesterday as a federal judge rejected a settlement between the Internet giant and authors and publishers who sued for copyright infringement.

Judge Denny Chin said the settlement, which was reached in 2008 to resolve two lawsuits challenging the mass scanning of books and the display of “snippets” for online searching “would simply go too far.”

The deal “would grant Google significant rights to exploit entire books, without the permission of the copyright owners,” said Judge Chin, a former Southern District judge who kept the case when he was elevated to the Second Circuit. “Indeed, the Amended Settlement Agreement would give Google a significant advantage over competitors, rewarding it for engaging in wholesale copyrighted works without permission, while releasing claims well beyond those presented in the case.”

Read the proposed $125 million settlement.

However, the judge said that many of his concerns could be addressed if the amended agreement was “converted from an ‘opt-out’ settlement to an ‘opt-in’ settlement” and he urged the parties to consider that as they return to negotiations.

Hilary Ware, managing counsel for Google, released a statement yesterday calling the judge’s decision “clearly disappointing.”

“Like many others, we believe this agreement has the potential to open-up access to millions of books that are currently hard to find in the U.S. today,” she said. “Regardless of the outcome, we’ll continue to work to make more of the world’s books discoverable online through Google Books and Google eBooks.”

The publisher plaintiffs released a statement saying the judge’s decision “provides clear guidance to all parties as to what modifications are necessary for its approval.”

Gary Reback, counsel to the Open Book Alliance, which opposed the deal, said, “The ruling ratifies the objections of a diverse cross-section of voices who stood up to Google and its partners—from the Justice Department and state attorneys general to authors and independent publishers to consumer and privacy advocates and members of the academic and library communities.”

Judge Chin held a settlement hearing in The Authors Guild v. Google Inc., 05 Civ. 8136, in February 2010 and expressed skepticism about the deal in which Google agreed to pay $125 million (NYLJ, Feb. 19, 2010).

Google has scanned more than 12 million books into its library since 2004, when it reached agreements with several major research libraries to digitally copy books and other writings.

The 166-page settlement, reached after almost 2 1/2 years of negotiations and amended after hundreds of objections were filed, would allow Google to continue to digitize books and inserts, sell subscriptions to an electronic books database and online access to individual books, and sell advertising on pages.

Judge Chin explained yesterday that, under the settlement, rights holders would keep the rights to authorize others, including Google competitors, to use the books in any way and Google would pay those rights holders 63 percent of all revenues from those uses. Rights holders could exclude their works from any of the uses and dictate that their books be removed from the database entirely.

The settlement would fund the establishment of a Book Rights Registry that will maintain a database of rights holders and there are several other provisions covering the division of revenues, unclaimed funds, and the distinction between in-print and out-of-print books.

Judge Chin said that “the vast majority” of some 500 filed comments on the original and amended settlement agreements objected to the deal and about 6,800 class members opted out.

Benefits to Settlement

The judge nonetheless acknowledged that there were many benefits to the settlement.

He said more books would be more accessible, especially for “libraries, schools, researchers and disadvantaged populations,” and the digitalization will speed the conversion of books to Braille and audio formats.

“Authors and publishers will benefit as well, as new audiences will be generated and new sources of income created,” he said. “Older books—particularly out-of-print books, many of which are falling apart buried in library stacks—will be preserved and given new life.”

But millions of books in the collection are still under copyright, despite Google’s defense of fair use under the Copyright Act, 17 U.S.C. §107, and Judge Chin said that there were “antagonistic interests between named plaintiffs and certain members of the class.”

Named plaintiffs have different interests from rights holders who do not come forward and academic authors have different interests than commercial authors, he said.

A central problem, Judge Chin said, was that the settlement “would transfer to Google certain rights in exchange for future and ongoing arrangements including the sharing of future proceeds, and it would release Google (and others) from liability for certain future acts.”

The Justice Department submitted a statement of interest calling it an “attempt to use the class action mechanism to implement forward-looking business arrangements that go far beyond the dispute before the Court in this litigation.”

Judge Chin said he was bothered because figuring “a mechanism for exploiting unclaimed books is a matter more suited for Congress than this court.”

As for the concern that the settlement would release claims that go far beyond the pleadings, the judge made clear the case was brought to challenge “snippets” for online searching, with Google arguing it was fair use to make small portions of the works available through search requests.

“The case was about the use of an indexing and searching tool, not the sale of complete copyrighted works,” he said.

“Google did not scan the books to make them available for purchase, and, indeed, Google would have no colorable defense to a claim of infringement based on the unauthorized copying and selling or other exploitation of entire copyrighted books,” he said. “Yet, the Amended Settlement Agreement would grant Google the right to sell full access to copyrighted works that it otherwise would have no right to exploit.”

The company would have control over the digital commercialization of millions of books that it obtained through “wholesale, blatant copying” without first obtaining permission.

He said the company’s business plan was described by one objector as, “So, sue me.”

The United States, Amazon and Microsoft all raised antitrust concerns, which the judge said “would give Google a de facto monopoly over unclaimed works” and “arguably give Google control over the search market.”

The deal, he said, also raised significant privacy concerns that should be addressed when the sides go back to the negotiating table, “while still accommodating Google’s marketing efforts.”

The judge scheduled a status conference for April 25.

Michael J. Boni and Joanne Zack of Boni & Zack in Bala Cynwyd, Pa., represent the author plaintiffs.

Bruce P. Keller, Jeffrey P. Cunard and Richard S. Lee of Debevoise & Plimpton represent the publisher plaintiffs.

Daralyn J. Durie and Joseph C. Gratz of Durie Tangri in San Francisco represent Google.

Assistant U.S. Attorneys John D. Clopper and Owen Knedler and Deputy Assistant Attorney General William F. Cavanaugh represented the government.