California Federal Court Finds That Claim of Direct Copyright Infringement Sufficiently Alleged against File-Storage Service Megaupload


A recent decision by a federal judge in the Southern District of California may have broad implications for the operators of online services hosting content at the direction of users. In Perfect 10, Inc. v. Megaupload, Ltd.,No. 00191-IEG (S.D. Cal. July 27, 2011), the court held that the plaintiff sufficiently alleged that operators of the popular online file-storage service Megaupload had engaged in "volitional conduct sufficient to hold it liable for direct infringement." In the past, courts have found online providers secondarily liable for infringement occurring on or through their services, but have rarely imposed direct liability where the infringing content originates from the service's users. The court found that, unlike many other online services, the complaint against Megaupload sufficiently alleged it to be much more than a mere "passive conduit" or "file storage company." The court's ruling was based on the assertions that Megaupload engaged in infringing activities itself by aggregating and disseminating user-uploaded content on separate websites, and by encouraging, and in some cases paying, its users to upload vast amounts of popular media through an affiliate rewards program. The court also ruled the complaint sufficiently stated claims of contributory infringement, trademark dilution and state unfair competition. It is important to note Megaupload did not vigorously attempt to defend its activities using the Digital Millennium Copyright Act (DMCA), which can act to shield online service providers from copyright liability for user-generated content. However, the DMCA's protections generally extend only to liability premised on storage alone, and not to direct or volitional conduct.

This case suggests that online service providers that host content on the behalf of users should be careful to maintain a passive role, and avoid acts which might encourage users to post potentially infringing content. In addition, service providers should always carefully follow the requirements of the DMCA to minimize the risk of liability for user uploaded content.