During the original Napster's heyday, Bertlesmann, through a venture capital firm (Hummer Winblad), invested in the upstart filesharing company. After the original Napster was shut down by legal maneuvers, two record companies (UMG and Capital) decided to sue Bertlesmann (which owns a major record label itself: BMG) and Hummer Winblad in order to hold the two investors liable for supporting Napster and recoup some deep pocket damages. C|Net News reports that the lawsuit has survived a motion to dismiss (Case against Napster backers gets green light). Read the 14-page decision: UMG Recordings v. Bertlesmann AG [PDF].
The defendants had claimed that the lawsuit was one for "tertiary" copyright infringement, that is, contributory infringement of a contributory infringement (or inducing an inducement). "Tertiary" infringement is generally not accepted as a proper cause of action. Why? Because liability becomes too far removed from the actual criminal activity. Causality branches and diffuses. So, generally, there has to be something more than "but for" causality in order to hold someone liable.
This principle still stands. In UMG v. Bertlesmann the judge has held that the plaintiffs have made more than conclusory allegations that Bertlesmann and Hummer Winblad actually controlled the original Napster and directed operations, which would make then contributory infringers, not tertiary ones. This decision is a somewhat troubling. Personally, I'm not so sure that the allegations aren't conclusory, but the judge has ruled that the case can move at least to summary judgement motions.
The INDUCE Act Part
Which brings me to the concept of tertiary liability under the Inducing Infringment of Copyrights Act (IICA, née INDUCE Act). Sometimes things are so obvious that they go without saying. However, as Derek Slater has pointed out to me, sometimes those are the most important points to talk about (Don't Innovate, Don't Even Invest).
One of the most devastatingly bad things that the INDUCE Act does is that it blows up the relatively clear lines of contributory and vicarious copyright infringment to extend liability into an ever more diffuse cloud of causality. As the EFF's mock INDUCE Act complaint shows, not only would the INDUCE Act permit lawsuits against Apple for the iPod, but plaintiffs could go after Toshiba for supplying Apple with the hard drives used in the device and C|Net for reviewing it (Prelude to a Fake Complaint). If contributory liability is similar to charging the promoter of illegal street races for reckless driving, the INDUCE Act is similar to charging automakers with reckless driving for making fast cars that can be used in street races. Under the INDUCE Act's doctrine of liability, if the Nile were guilty of flooding Cairo, lawsuits could be filed against every tributary.
According to the INDUCE Act, "intent [to induce] may be shown by acts from which a reasonable person would find intent to induce infringement based upon all relevant information about such acts then reasonably available to the actor." This is an incredibly low standard. Anyone in the vicinity of infringement can get sued and it isn't clear what one can do to remain safe, except be nowhere in the vicinity of infringement. Even worse is that the proposed statute is designed to allow plaintiffs to take their cases all the way through to trial, surviving all attempts at dismissal for even weak cases (and costing the defendants plenty even if they prevail).
The practical consequence of this is to chill innovation to subzero temperatures. Investors, suppliers, and potential business partners (among others) will all be potentially liable under the INDUCE Act. They'll all have to ask themselves whether doing business with a company that Hollywood might not like is worth the risk of being hit with a meritless lawsuit. The likely result? No one is going to go anywhere near innovative new internet and consumer electronics companies unless they already have Hollywood's blessing.
If innovation is Superman, the INDUCE Act is green kryptonite.
Want to know more about the INDUCE Act?
Please see LawMeme's well-organized index to everything I've written on the topic: The LawMeme Reader's Guide to Ernie Miller's Guide to the INDUCE Act.