Urban Legal Myths

A counterclaim filed against major U.S. record label plaintiffs on September 25, 2006, by peer-to-peer (“P2P”) technology defendant Lime Wire LLC adds a twist to the familiar cocktail of copyright issues facing distributors of music and videos over the Internet.

The plaintiffs, which include Universal Music Group, Warner Bros. Records, Sony/BMG and Capitol/EMI, allege in their August 4, 2006 lawsuit in the U.S. District Court, Southern District of New York, that Lime Wire should be held liable for the allegedly “staggering” scope of copyright infringements over the Lime Wire network, enabled by the so-called Gnutella file sharing protocol. The record labels allege that Lime Wire has positioned itself as successor to P2P platforms such as Napster, Aimster, Kazaa, and Grokster, which previously have been found liable for copyright infringements over similar P2P platforms. These infringements relate to the unlawful Internet downloading and uploading of master recordings, as opposed to the musical compositions embodied in those master recordings.

Lime Wire argues in its defence that the development of digital technology no doubt disrupts the major record labels’ traditional distribution models and that in an effort to maintain a firm grip on the marketplace, the labels unfairly have resorted to anticompetitive tactics. That is, aside from its many lines of defence relating the nature of the technology, where for example, Lime Wire’s open source software uses a “bootstrap” method of connecting to other peers and therefore does not rely on hubs or servers which might transmit, copy or cache unlicensed copies of works, Lime Wire relies on the affirmative defence that the labels are misusing their intellectual property rights with the result that those rights should be unenforceable.

Given the expansive nature of secondary liability for copyright infringement in the U.S., Lime Wire’s defence efforts in court will be no party, especially in view of the September 27, 2006, judgment in Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd. in the U.S. District Court, Central District of California. In that case, on a summary judgment motion, the court demolished Grokster’s argument, similar to Lime Wire’s, that copyright holders had leveraged their copyright in an anticompetitive manner. In that case, the court concludes that as an affirmative defence, misuse of copyright is limited to areas where creative activities might be impaired. The court observes for example (page 57) that “[p]rice fixing, in and of itself, does not restrict competitors or the public from engaging in creative activities.” The result is that antitrust violations are not, without more, sufficient to trigger the defence of misuse of copyright.

This makes the main ingredient of Lime Wire’s legal position its counterclaim, which Lime Wire no doubt will try to maintain as a separate, stand-alone argument. That is, Lime Wire has little choice but to spike its legal position, and its negotiation position for any settlement, with a distinctive and juicy counterclaim, alleging that the major record labels have conspired to commit illegal and anticompetitive activities in the market for the online distribution of music.

The flavor of Lime Wire’s allegations against the major record labels by now should be recognizable, both to music industry insiders and members of the music-enjoying public. However, if the Lime Wire case proceeds to trial, this will be a rare occasion where those allegations are tested in a way that could have significant financial repercussions for the major labels. That is, even if the record labels prevail in their action against Lime Wire, it is possible that Lime Wire could prevail in its counterclaim. Lime Wire would seek to set off damages that might be awarded against it in the dispute. The damages awarded to Lime Wire in the counterclaim, could be greater than the damages awarded to the major record labels in the main action.

However, Lime Wire’s mix of defence and counterclaim will not go down well if the U.S. court applies a Canadian way of thinking to the clash between the intellectual property rights of master recording owners and the rights of others in the marketplace to license those masters from them. In the case of Canada (Director of Investigation and Research) v. Warner Music Canada Ltd. (1997), 78 C.P.R. (3d) 321, where the copyright holder, Warner Music, refused to license master recordings to BMG, its intellectual property rights trumped BMG’s restraint of trade complaints. Warner was found entitled to refuse to deal with BMG. The competition tribunal stated that, “… the right granted…to exclude others is fundamental to intellectual property rights and cannot be considered to be anti-competitive…”.

Of course, every case turns on its unique circumstances, so it is too early to predict the outcome of the Lime Wire case. Once thing is certain however, this mixture of issues is bound to remain a juicy one.