Adult publisher Perfect 10 has developed a reputation for making a business out of suing Internet services for alleged copyright infringement.
In recent years the company has targeted Google, Amazon, MasterCard and Visa, RapidShare and Depositfiles, plus hosting providers LeaseWeb and OVH.
Perfect 10 has secured private settlements from several of these companies but has never succeeded in a contested court case. The company hoped that a new suit against Usenet provider Giganews would provide a much-needed victory, but the whole thing has turned into a disaster.
In November 2014 a ruling from the U.S. District Court for the Central District of California found that Giganews was not liable for the infringing activities of its users and last month Perfect 10 was roundly criticized for multiple failings by the same Court.
“Perfect 10 failed to produce any evidence supporting its claim of direct
infringement,” the Judge wrote, adding that it also “failed to produce any evidence supporting its claim of indirect infringement.”
While that was a particularly poor way to lose a case, a punishing costs ruling handed down yesterday rubbed salt into Perfect 10’s wounds. The United States District Court for the Central District of California ordered the publisher to pay Giganews $5.6m in attorney’s fees and costs.
Outlining his perception of Perfect 10’s business model, Judge Andre Birotte Jr said that the company hadn’t behaved like a wronged copyright holder.
“Perfect 10’s undisputed conduct in this action has been inconsistent with a party interested in protecting its copyrights. All of the evidence before the Court demonstrates that Perfect 10 is in the business of litigation, not protecting its copyrights or ‘stimulat[ing] artistic creativity for the general public good’,” the Judge wrote.
But that was just the beginning.
“Perfect 10 has never been a self-sustaining business, and to date, has lost more than $50 million dollars, if not more. However, this loss appears to be largely intended by Perfect 10’s President and CEO Norman Zada, who described Perfect 10 [..] as a ‘tax writeoff’,” Judge Birotte added.
“In fact, Zada [said] that he ‘needed [Perfect 10] to offset money he made in the market’ and ‘needed the loss’ to represent how small businesses couldn’t make money because of piracy on the Internet.”
Just how far Perfect 10 has immersed itself in copyright litigation is made in clear in the ruling, with the Judge noting that more than half of the company’s revenues had been derived from settlements and default judgments, with Zada spending “eight hours a day, 365 days a year” on litigation.
“Indeed, Zada admitted that, in the past, Perfect 10 has expressly purchased copyrights from other copyright holders ‘because [Perfect10] thought they would be helpful in [its] litigation efforts’,” the Judge added.
Also of note is that in many of its cases Perfect 10 criticized online service providers for not responding adequately to its complaints under the DMCA, but in Tuesday’s ruling the Judge makes it very clear that Perfect 10 is the party at fault.
“Perfect 10 has a long, documented history of sending service providers inadequate takedown notices under the DMCA that fail to identify specific infringing material, and then bringing suit for the service providers’ failure to respond to deficient DMCA takedown notices,” the Judge wrote.
While the victory will be sweet for Giganews, the company will be particularly pleased with Judge Birotte’s recognition of Perfect 10’s attack on its business model.
“Perfect 10’s unmeritorious claims against the leading Usenet service provider in the country posed a serious threat to the public’s access to free and competitive expression,” the Judge wrote.
In a statement sent to TorrentFreak, Giganews co-Founder Ron Yokubaitis welcomed the ruling.
“This judgment is a complete victory for Giganews, a validation of Usenet as one of the foundational protocols of the Internet, and a recognition of the users who rely on it every day,” he said.
“Online service providers and Internet companies are under assault from copyright trolls like Perfect 10, but we have followed the DMCA since its inception, and are proud to have stood up to the meritless claims of a serial litigator who was hoping for an easy pay day.”
The big question now is where Perfect 10 goes from here. With its business strategy now a record of the Court it seems likely that potential future targets will be less intimidated and settlements less forthcoming.
September last year the Digital Citizens Alliance and NetNames released a report that looked into the business models of “shadowy” file-storage sites.
Titled “Behind The Cyberlocker Door: A Report How Shadowy Cyberlockers Use Credit Card Companies to Make Millions,” the report offers insight into the money streams that end up at these alleged pirate sites.
The research claims that the sites in question are mostly used for copyright infringement. But while there are indeed many shadowy hosting services, many were surprised to see the Kim Dotcom-founded Mega.co.nz on there.
For entertainment industry groups the report offered an opportunity to put pressure on Visa and MasterCard. In doing so they received support from U.S. Senator Patrick Leahy, who was also the lead sponsor of the defunct controversial Protect IP Act (PIPA).
Senator Leahy wrote a letter to the credit card companies claiming that the sites mentioned in the report have “no legitimate purpose or activity,” hoping they would cut their connections to the mentioned sites.
Visa and MasterCard took these concerns to heart and pressed PayPal to cut off its services to Mega, which eventually happened late last month. Interestingly, PayPal cited Mega’s end-to-end-encryption as one of the key problems, as that would make it harder to see what files users store.
The PayPal ban has been a huge blow for Mega, both reputation-wise and financially. And the realization that the controversial NetNames report is one of the main facilitators of the problems is all the more frustrating.
TorrentFreak spoke with CEO Graham Gaylard, who previously characterized the report as “grossly untrue and highly defamatory,” to discuss whether Mega still intends to take steps against the UK-based NetNames for their accusations.
Initially, taking legal action against NetNames for defamation was difficult, as UK law requires the complaining party to show economic damage. However, after the PayPal ban this shouldn’t be hard to do.
Gaylard is traveling through Europe at the moment and he notes that possible repercussions against the damaging report are high on the agenda.
“Yes, I am here to see Mega’s London-based legal counsel to discuss the next steps in progressing the NetNames’ response,” Gaylard informs TF.
Mega’s CEO couldn’t release any details on a possible defamation lawsuit, but he stressed that his company will fiercely defend itself against smear campaigns.
“Mega has been operating, and continues to operate a completely legitimate and transparent business. Unfortunately now, with the blatant, obvious, political pressure and industry lobbying against Mega, Mega needs to defend itself and will now cease taking a passive stance,” Gaylard says.
According to the CEO Mega is running a perfectly legal business. The allegation that it’s a piracy haven is completely fabricated. Like any other storage provider, there is copyrighted content on Mega’s servers, but that’s a tiny fraction of the total stored.
To illustrate this, Gaylard mentions that they only receive a few hundred takedown notices per month. In addition, he notes more than 99.7% of the 18 million files that are uploaded per day are smaller than 20MB in size, not enough to share a movie or TV-show.
These statistics are certainly not the hallmark of a service with “no legitimate purpose or activity,” as was claimed.
While the PayPal ban is a major setback, Mega is still doing well in terms of growth. They have 15 million registered customers across 200 countries, and hundreds of thousands of new users join every month.
The world could really need a credible alternative to PayPal
There are way too many stories of Paypal unfairly and ridiculously cutting off services that rely on it as a payment mechanism, but here’s yet another one. Mega, the cloud storage provider that is perhaps well-known for being Kim Dotcom’s “comeback” act after the US government shut down Megaupload, has had its Paypal account cut off. The company claims that Paypal was pressured by Visa and Mastercard to cut it off:
Visa and MasterCard then pressured PayPal to cease providing payment services to MEGA.
MEGA provided extensive statistics and other evidence showing that MEGA’s business is legitimate and legally compliant. After discussions that appeared to satisfy PayPal’s queries, MEGA authorised PayPal to share that material with Visa and MasterCard. Eventually PayPal made a non-negotiable decision to immediately terminate services to MEGA. PayPal has apologised for this situation and confirmed that MEGA management are upstanding and acting in good faith. PayPal acknowledged that the business is legitimate, but advised that a key concern was that MEGA has a unique model with its end-to-end encryption which leads to “unknowability of what is on the platform”.
MEGA has demonstrated that it is as compliant with its legal obligations as USA cloud storage services operated by Google, Microsoft, Apple, Dropbox, Box, Spideroak etc, but PayPal has advised that MEGA’s “unique encryption model” presents an insurmountable difficulty.