MONOPOLISTIC GATEKEEPERS‘ VICARIOUS LIABILITY FOR COPYRIGHT INFRINGEMENT Ke Steven Wan ABSTRACT Recent cases have reignited debate on vicarious liability for gatekeepers providing essential services such as electronic payment processing services. Generally speaking, gatekeeper liability is undesirable when a gatekeeper lacks the right and ability to control infringement. A monopolistic gatekeeper of an essential service, however, is able to exclude infringers from its service network, which may act as an effective deterrence. Thus, although a monopolistic gatekeeper is not able to control infringement directly, it can deter infringers by threat of exclusion. This Article sets forth different prongs for vicarious liability based on three types of relationships: that of employers to their employees, that of premises providers to their tenants, and that of monopolistic providers of essential services to their users. Taking Baidu, Tiffany v. eBay, and Perfect 10 v. Visa as examples, this Article discusses the desirability of monopolistic gatekeepers‘ vicarious liability for copyright infringement and explores the rationales for it, such as deterrence and corrective justice. This Article also proposes a liability regime for monopolistic gatekeepers to balance their risk with the need to prevent infringement.  Assistant Professor, City University of Hong Kong School of Law. S.J.D., LL.M. University of Pennsylvania Law School. This Article greatly benefited from comments and criticisms by Llewellyn Gibbons, Daniel Gervais, Patricia Judd, and the participants of the conference Intellectual Property Developments in China: Global Challenge, Local Voices at Drake Law School on October 16–17, 2009. I would like to thank Regent University Law Review for its excellent editorial work. 66 REGENT UNIVERSITY LAW REVIEW [Vol. 23:65 TABLE OF CONTENTS ABSTRACT ..................................................................................................... 65 TABLE OF CONTENTS.................................................................................... 66 I. INTRODUCTION ......................................................................................... 66 II. EXAMINATION OF VICARIOUS LIABILITY CASES ...................................... 68 III. THE TWO PRONGS OF VICARIOUS LIABILITY ......................................... 75 A. The Control Prong .............................................................................. 75 B. The Direct Financial Benefit Prong .................................................. 76 IV. MONOPOLISTIC GATEKEEPERS‘ VICARIOUS LIABILITY ........................... 78 A. Baidu .................................................................................................. 78 B. Tiffany v. eBay ................................................................................... 82 C. Perfect 10 v. Amazon and Perfect 10 v. Visa ................................... 82 V. THE DESIRABILITY OF MONOPOLISTIC GATEKEEPERS‘ VICARIOUS LIABILITY ................................................................................................ 92 VI. PROPOSED LIABILITY REGIME FOR MONOPOLISTIC GATEKEEPERS ....... 94 VII. CONCLUSION ......................................................................................... 94 I. INTRODUCTION The Internet has provided new opportunities for wrongdoers and has consequently introduced new challenges for law enforcement. Frustrated by the relative anonymity of subscribers, plaintiffs and law enforcers have increasingly sought to hold internet service providers (―ISPs‖) liable for the misconduct of their subscribers. In 1998, the Digital Millennium Copyright Act (―DMCA‖) incorporated a series of affirmative defenses, or ―safe harbors,‖ for ISPs that might otherwise be found vicariously liable for subscriber infringements.1 Baidu, the largest search engine in China, uses an auction-based, pay-for-performance (―P4P‖) system, which allows its customers to bid for the best placement of their links among Baidu‘s search results.2 Under Chinese law, Baidu is eligible for ―safe harbors‖ as long as it complies with a notice-and-takedown procedure.3 In Perfect 10 v. Visa, 1 Digital Millennium Copyright Act, Pub. L. No. 105-304, §§ 1, 201–03, 112 Stat. 2860, 2877–81 (1998) (codified at 17 U.S.C. § 512 (2006)). 2 Baidu, Inc. (BIDU.O) Company Profile, REUTERS.COM, http://www.reuters.com/ finance/stocks/companyProfile?rpc=66&symbol=BIDU.O (last visited Nov. 2, 2010). 3 Xìnxī Wǎngluò Chuánbò Quán Bǎohù Tiáolì (信息网络传播权保护条例) [Regulation on Protection of the Right to Network Dissemination of Information] 2010] MONOPOLISTIC GATEKEEPERS’ VICARIOUS LIABILITY 67 credit card companies that charged website fees for processing the websites‘ sales of infringing materials were not held vicariously liable.4 The dissent, however, argued that the plaintiffs had stated a valid claim of vicarious infringement.5 In Tiffany v. eBay,6 although eBay derived a direct financial benefit from the sale of counterfeit goods by charging sellers fees, eBay was not found vicariously liable.7 Recent cases have reignited debate on vicarious liability for gatekeepers providing essential services such as electronic payment processing.8 Gatekeeper liability is generally desirable when gatekeepers can deter infringement at acceptable costs. In all other cases, efforts to expand gatekeeper liability should weigh gatekeeping costs against the effectiveness of preventing misconduct. Generally speaking, gatekeeper liability should not attach when a gatekeeper lacks the right and ability to control infringement. A monopolistic gatekeeper of an essential service, however, is able to exclude infringers from its service network, which may act as an effective deterrece. Thus, although a monopolistic gatekeeper is not able to control infringement directly, it can deter infringers by threat of exclusion. Taking Baidu, Tiffany v. eBay,9 and Perfect 10 v. Visa10 as examples, this Article discusses the desirability of holding monopolistic gatekeepers vicariously liable for copyright infringement and explores the rationales for doing so. This Article aims to add three contributions to the analysis of gatekeeper liability. First, this Article argues that a monopolistic gatekeeper can deter infringers by threat of exclusion despite its limited ability to monitor infringers‘ activity. Unlike a dance hall proprietor,11 a monopolistic provider of an essential service lacks the ability to exercise physical control over infringers‘ activity, as the activity does not occur on (promulgated by the St. Council, May 18, 2006, effective July 1, 2006), arts. 22–23 (China), translated in China Internet Project, Order No. 468 of the State Council, PRC, CHINA IT LAW, http://www.chinaitlaw.org/?p1=regulations&p2=060717003346 (last visited Nov. 3, 2010) [hereinafter Chinese Regulation]. 4 Perfect 10, Inc. v. Visa Int‘l Serv., Assoc., 494 F.3d 788, 792–93, 802 (9th Cir. 2007). 5 Id. at 810 (Kozinski, J., dissenting). 6 Tiffany (NJ), Inc. v. eBay, Inc., 576 F. Supp. 2d 463 (S.D.N.Y. 2008) 7 Id. at 494–95, 501. 8 See, e.g., Bryan V. Swatt et al., Comment, Perfect 10 v. Visa, Mastercard, et al: A Full Frontal Assault on Copyright Enforcement in Digital Media or a Slippery Slope Diverted?, 8 CHI.-KENT J. INTELL. PROP. 85, 92, 94–95 (2008), available at http://jip. kentlaw.edu/art/volume%208/8%20Chi-Kent%20J%20Intell%20Prop%2085.pdf. 9 576 F. Supp. 2d 463. 10 494 F.3d 788. 11 E.g., Dreamland Ball Room, Inc. v. Shapiro, Bernstein & Co., 36 F.2d 354, 355 (7th Cir. 1929) (holding a dance hall proprietor vicariously liable for copyright infringement by its orchestra, even though the orchestra was an independent contractor). 68 REGENT UNIVERSITY LAW REVIEW [Vol. 23:65 its premises. If it has market power in the relevant market, however, it can exclude infringers from its service network. Because the monopolistic gatekeeper lacks the ability to supervise, the rationale for vicarious liability cannot be deterrence but corrective justice, which requires the direct financial benefit prong to be interpreted narrowly. Second, this Article develops Jules Coleman‘s theory of corrective justice12 and applies it to cases in which the third party derives no tangible gains from infringement. Coleman‘s theory only covers tangible gains and provides no justification for applying vicarious liability in routine negligence cases in which the defendant derived no tangible gains.13 Nevertheless, when the third party knowingly contributes to the infringement with intent to infringe, it gains a sense of superiority, which renders it unjustly enriched morally. Thus, this Article argues that the ―intent to infringe‖ requirement justifies corrective justice although the third party derives no tangible gains. Finally, this Article proposes a liability regime for monopolistic gatekeepers to balance their risk with the need to prevent infringement. Under the proposed regime, the monopolistic gatekeeper may be allowed to pay nominal damages at an infringer‘s first offense. If the same infringer commits the infringement a second time, the monopolistic gatekeeper can be ordered to pay full damages. The adverse effects of vicarious liability may be mitigated in this way. This Article proceeds in five parts. Part II reviews vicarious liability cases in general and discusses the justifications for vicarious liability. Part III analyzes the two prongs of vicarious liability: control and direct financial benefit. Part IV sets forth different prongs for vicarious liability, based on three types of relationships: that of employers to their employees, that of premises providers to their tenants, and that of monopolistic providers of essential services to their users. This Part also discusses the rationales of deterrence and corrective justice present in each of these relationships. Part V explores the desirability of vicarious liability for monopolistic gatekeepers, taking Baidu as an example. Part VI proposes a liability regime for such gatekeepers, using credit card companies as an example. II. EXAMINATION OF VICARIOUS LIABILITY CASES Before discussing the different interpretations of vicarious liability, it is necessary to determine the justification for it. Commentators 12 Jules Coleman, Corrective Justice and Wrongful Gain, 11 J. LEGAL STUD. 421, 423 (1982). 13 See id.; see also Jules L. Coleman, Moral Theories of Torts: Their Scope and Limits. Part II, 2 LAW & PHIL. 5, 12 (1983) (noting that some tort claims are rooted in principles other than corrective justice). 2010] MONOPOLISTIC GATEKEEPERS’ VICARIOUS LIABILITY 69 provide several rationales for vicarious liability, including enterprise liability, loss spreading, and deterrence.14 Vicarious liability is justified in an employment context because an employer can control what is done on the job and how it is done.15 Alfred Yen notes that ―[m]odern decisions, when explaining policy justifications for vicarious liability[,] . . . commonly refer to risk allocation.‖16 He opposes vicarious liability for ISPs because it may force them to monitor their subscribers too closely and create social losses by suppressing non-infringing activities.17 Yen argues: In the vast majority of cases, the existence of liability depends on a showing that the defendant is at fault. This means that contributory liability and inducement will govern most third-party copyright liability cases, with vicarious liability limited to those cases [in which] agency principles such as respondeat superior would impose strict liability on defendants.18 Such a limited application of vicarious liability is unwarranted, however. Professor Yen‘s arguments may be true for courts adopting the legal control test. Courts adopting an actual control test, however, do not necessarily base their decisions on risk allocation. Rather, they are more likely to be guided by deterrence, which refers to deterring infringement.19 14 See, e.g., Andrew Beckerman-Rodau, A Jurisprudential Approach to Common Law Legal Analysis, 52 RUTGERS L. REV. 269, 295–96 (1999); Steven P. Croley, Vicarious Liability in Tort: On the Sources and Limits of Employee Reasonableness, 69 S. CAL. L. REV. 1705, 1707–08 (1996); Gary T. Schwartz, The Hidden and Fundamental Issue of Employer Vicarious Liability, 69 S. CAL. L. REV. 1739, 1756 n.91 (1996); Alan O. Sykes, The Economics of Vicarious Liability, 93 YALE L.J. 1231, 1246–47 (1984); Robert B. Thompson, Unpacking Limited Liability: Direct and Vicarious Liability of Corporate Participants for Torts of the Enterprise, 47 VAND. L. REV. 1, 3–4 (1994). 15 E.g., Zimprich v. Broekel, 519 N.W.2d 588, 590–91 (N.D. 1994). 16 Alfred C. Yen, Third-Party Copyright Liability After Grokster, 91 MINN. L. REV. 184, 219 (2006) (quoting Polygram Int’l Publ’g, Inc. v. Nev./TIG, Inc., 855 F. Supp. 1314, 1325 (D. Mass. 1994)). 17 Id. at 213–14. 18 Id. at 239. 19 Cf. Beckerman-Rodau, supra note 14, at 295–96 (arguing in the context of employer-employee vicarious liability that the reason behind the control requirement is vicarious liability will only deter those defendants who have control over the direct tortfeasors); Schwartz, supra note 14, at 1756 (arguing that the deterrence rationale only applies to employer-employee vicarious liability if the employer has the actual ability to penalize the employee); Sykes, supra note 14, at 1246–47 (arguing that vicarious liability causes principals to internalize costs inflicted by insolvent agents, thereby deterring them from making inefficient decisions); Thompson, supra note 14, at 14 (arguing that deterrence-based rationales for piercing the corporate veil are stronger when applied to officers or to shareholders with managerial functions than when applied to shareholders with less control over the corporation). 70 REGENT UNIVERSITY LAW REVIEW [Vol. 23:65 In Shapiro, Bernstein & Co. v. H. L. Green Co.,20 the court laid out the modern prongs of copyright vicarious liability, holding that ―[w]hen the right and ability to supervise coalesce with an obvious and direct financial interest in the exploitation of copyrighted materials[,] . . . the purposes of copyright law may be best effectuated by the imposition of liability upon the beneficiary of that exploitation.‖21 The decision was unlikely to have been based on deterrence because the court held that the case at hand ―lie[s] closer on the spectrum to the employer-employee model than to the landlord-tenant model.‖22 Gershwin Publishing Corp. v. Columbia Artists Management, Inc.23 is an early example of a copyright case that found vicarious liability based on deterrence in an actual control context.24 Copyrighted music was performed without authorization at a concert promoted by Columbia Artists Management, Inc. (―CAMI‖).25 CAMI had ―act[ed] as manager for [the] concert artists‖ and created local organizations that promoted the artists in smaller communities.26 Once the concert arrangement was made, CAMI received the titles of the music to be performed and printed the concert programs.27 The court noted that in past cases, ―a person who ha[d] promoted or induced the infringing acts of the performer ha[d] been held jointly and severally liable as a ‗vicarious‘ infringer, even though he ha[d] no actual knowledge that copyright monopoly [was] being impaired.‖28 The court assumed that CAMI was able to deter infringement at low costs because of its promotion of the infringement: Although CAMI had no formal power to control either the local association or the artists for whom it served as agent, it is clear that the local association depended upon CAMI for direction in matters such as this, that CAMI was in a position to police the infringing conduct of its artists, and that it derived substantial financial benefit from the actions of the primary infringers.29 20 316 F.2d 304 (2d Cir. 1963). 21 Id. at 307. 2 2 Id. at 308. 2 3 443 F.2d 1159 (2d Cir. 1971) 24 See id. at 1162–63. But see Charles S. Wright, Actual Versus Legal Control: Reading Vicarious Liability for Copyright Infringement into the Digital Millennium Copyright Act of 1998, 75 WASH. L. REV. 1005, 1017 (2000) (arguing that Gershwin is a case adopting legal control). 25 Gershwin, 443 F.2d at 1160. 26 Id. 27 Id. at 1161. 28 Id. at 1162 (citing Shapiro, Bernstein & Co. v. H. L. Green Co., 316 F.2d 304, 307 (2d Cir. 1963); Dreamland Ball Room, Inc. v. Shapiro, Bernstein & Co., 36 F.2d 354, 355 (7th Cir. 1929)). 29 Id. at 1163. 2010] MONOPOLISTIC GATEKEEPERS’ VICARIOUS LIABILITY 71 Thus although the relationship between CAMI and the direct infringers did not resemble the employer-employee model, the court held CAMI vicariously liable.30 In so holding, the court noted that in the past it had ―found [that] the policies of the copyright law would be best effectuated‖ by holding premises providers liable for infringement that they had the power to police and from which they financially benefitted, indicating that its decision was based on deterrence.31 In Artists Music Inc. v. Reed Publishing (USA) Inc.,32 Reed rented trade-show booth space to 134 exhibitors for a flat rental.33 Reed also collected admission fees from attendees at the trade show.34 During the show, some exhibitors used music as part of their show without obtaining copyright owners‘ permission.35 The copyright owner claimed that Reed should be held vicariously liable for the exhibitors‘ infringement.36 The court found ―that the relationship between trade show sponsors and trade show exhibitors is the legal and functional equivalent of the relationship between landlords and tenants.‖37 As for the issue of supervision, the court believed that Reed ―had no right and ability to supervise and control the actions of the exhibitors.‖38 Although the plaintiffs argued that Reed could have policed the exhibitors, the court rejected the plaintiffs‘ argument because Reed was not in a good position to prevent the 134 exhibitors‘ copyright infringement.39 The court noted that ―Reed would have had to hire several investigators with the expertise to identify music, to determine whether it was copyrighted, to determine whether the use was licensed, and finally to determine whether the use was a ‗fair use.‘‖40 By contrast, the court in Polygram International Publishing Inc. v. Nevada/TIG, Inc.41 indicated that it would have held the trade show operator liable but for a defect in the plaintiffs‘ pleadings.42 In Polygram, 30 Id. 31 Id. at 1162 (emphasis added) (citing Shapiro, Bernstein & Co., 316 F.2d 304, 307 (2d. Cir. 1963)). 32 31 U.S.P.Q.2d 1623 (S.D.N.Y. 1994). 33 Id. at 1624. 34 Id. 35 Id. 36 See id. at 1625. 37 Id. at 1626. 38 Id. 39 Id. at 1627; Alfred C. Yen, Internet Service Provider Liability for Subscriber Copyright Infringement, Enterprise Liability, and the First Amendment, 88 GEO. L.J. 1833, 1849–50 (2000). 40 Artists Music, 31 U.S.P.Q.2d at 1627. 41 855 F. Supp. 1314 (D. Mass. 1994). 42 Id. at 1325, 1329, 1333. The court held that the copyright infringement claim failed because the plaintiffs failed to allege that the exhibitors directly infringed the 72 REGENT UNIVERSITY LAW REVIEW [Vol. 23:65 Interface rented booth space to over 2,000 trade show exhibitors for rental fees.43 Interface stated in its rules and regulations for the trade show that it was the exhibitors‘ responsibility to obtain copyright license for any music played at the event.44 The plaintiffs sued Interface, alleging that it was vicariously liable for unauthorized use of their music by the exhibitors.45 The difference between Artists Music46 and Polygram47 is that Interface exercised actual control over the trade show exhibitors by providing the rules and regulations and arranging for employees to ensure its compliance. For example, the employees were available to address issues such as exhibitors encroaching on each others‘ space or blocking the aisle at the show.48 The court in Polygram stated that it would have held Interface vicariously liable because the actual control made Interface well positioned to prevent the unauthorized use of music.49 Fonovisa, Inc. v. Cherry Auction, Inc.,50 however, is a seminal case of expansive interpretation of vicarious liability rather than a case adopting deterrence.51 Cherry Auction operated a swap meet where customers purchased merchandise from individual vendors.52 It rented booth space to vendors for a daily rental fee, supplied parking and advertising for the swap meet, and reserved the right to exclude any vendor for any reason.53 The plaintiffs claimed that Cherry Auction should be held vicariously liable for sale of counterfeit recordings by independent vendors.54 The court found that Fonovisa had stated a claim for vicarious liability based on Cherry Auction‘s right to terminate vendors for any reason.55 Fonovisa is distinguished from Polygram, in which the trade show operator was required to monitor a limited amount of music played by plaintiffs‘ copyrights—a necessary element for holding the tradeshow vicariously liable. Id. at 1318, 1323. 43 Id. at 1319. 44 Id. 45 Id. at 1320. 46 31 U.S.P.Q.2d 1623 (S.D.N.Y. 1994). 47 855 F. Supp. 1314. 48 Id. at 1328–29. 49 Id. at 1329. 50 76 F.3d 259 (9th Cir. 1996). 51 See id. at 263. 52 Id. at 261. 53 Id. 54 Id. 55 Id. at 263-64. 2010] MONOPOLISTIC GATEKEEPERS’ VICARIOUS LIABILITY 73 exhibitors.56 Although Cherry Auction conducted general advertising and promoted the swap meet,57 this case is also different from Gershwin, in which the defendant CAMI obtained the titles of the music to be performed and printed the concert programs.58 While CAMI could police the music to be performed at low costs,59 Cherry Auction‘s general advertising did not enable it to deter copyright infringement, because Cherry Auction had a larger number of vendors and merchandise to monitor.60 The ability to control materials on the Internet may become stronger with the development of information technology. For example, the online music peer-to-peer file sharing service Napster also has a huge number of music files to monitor, but it has been held to be able to detect infringing files cost effectively because of its technology.61 Perfect 10, Inc. v. Cybernet Ventures, Inc.,62 is another case in which expansive interpretation of vicarious liability is applied.63 Cybernet ―ran an age[-]verification service called ‗Adult Check‘ through which it permitted access to and collected payments for pornographic websites.‖64 The plaintiff sought a preliminary injunction, claiming that Cybernet was vicariously liable for the unlicensed use of celebrity images on the websites of the service‘s subscribers.65 The court found that Cybernet monitored the participating websites for image quality and compliance with Cybernet‘s policies.66 The court held that Perfect 10 had a strong likelihood of success for its vicarious copyright infringement claims against Cybernet because Cybernet was able to exclude infringers from its service and used passwords to control customer access.67 Despite its monitoring program to ensure image quality, however, Cybernet did not have the ability to remove or block access to infringing materials because 56 See Polygram, 855 F. Supp. 1314, 1317 (D. Mass. 1994). 57 See Fonovisa, 76 F.3d 259, 261 (9th Cir. 1996). 58 Gershwin Publ‘g Corp. v. Columbia Artists Mgmt., Inc., 443 F.2d 1159, 1161 (2d Cir. 1971). 59 Id. at 1163. 60 Fonovisa, 76 F.3d at 261 (noting that the ―Sheriff's Department [had] raided the Cherry Auction swap meet and seized more than 38,000 counterfeit recordings‖ in 1991). Although the court found that Cherry Auction had control over its vendors, it did so on the basis of legal control. Id. at 263. 61 A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1011, 1020 n.5, 1023 (9th Cir. 2001). 62 213 F. Supp. 2d 1146 (C.D. Cal. 2002). 63 Yen, supra note 16, at 207–08. 64 Jennifer Bretan, Harboring Doubts About the Efficacy of § 512 Immunity Under the DMCA, 18 BERKELEY TECH. L.J. 43, 61 (2003) (citing Cybernet, 213 F. Supp. 2d at 1158). 65 Cybernet, 213 F. Supp. 2d at 1152–53, 1162. 66 Id. at 1173. 67 Id. at 1157, 1171, 1173–74. 74 REGENT UNIVERSITY LAW REVIEW [Vol. 23:65 each underlying website was responsible for its own content.68 The court held that Cybernet‘s mere ability to deny its age-verification services to offending websites would likely be considered enough control to satisfy the control prong of vicarious liability.69 Thus, the Cybernet decision may generate an incredible chilling effect. Religious Technology Center v. Netcom On-Line Communication Services, Inc.70 may be the first case to consider ISP vicarious liability for copyright infringement. In Religious Technology Center, a subscriber submitted numerous infringing postings to a bulletin-board service, which accessed the Internet through the ISP Netcom.71 The plaintiffs made allegations against Netcom of vicarious liability for unauthorized use of their works by the subscriber.72 The court accepted the plaintiffs‘ evidence that Netcom was able to delete specific postings as well as suspend the accounts of subscribers who engaged in commercial advertising, posted obscene materials, and made off-topic postings.73 The court found that Netcom might have the ability to control infringements because Netcom‘s sanction over the abusive conduct allowed it to deter copyright infringement cost effectively.74 The court, however, found no vicarious liability because Netcom did not receive a direct financial benefit by charging a flat monthly fee.75 A&M Records, Inc. v. Napster, Inc.76 is another important case. The court held in this case that Napster was likely to be found vicariously liable for copyright infringement.77 Napster used a process called ―peer- to-peer‖ file sharing to enable its users to transmit MP3 files among themselves.78 It maintained a ―collective directory‖ of files on its server, although the contents of the MP3 files were kept in the computers of the users who submitted them.79 The court held that Napster was likely to be found vicariously liable because it had the ability to monitor the names of ―infringing material[s] listed on its search indices.‖80 Unlike CAMI, which promoted the infringement, Napster did not explicitly 68 Id. at 1158. 69 Id. at 1173–74. 70 907 F. Supp. 1361 (N.D. Cal. 1995). 71 Id. at 1365–66. 72 Id. at 1367. 73 Id. at 1376. 74 See id. 75 Id. at 1377. 76 239 F.3d 1004 (9th Cir. 2001). 77 Id. at 1024. 78 Id. at 1011. 79 Id. at 1012. 80 Id. at 1024.