StreamCast Networks, Inc. (originally doing business under “MusicCity.com” and the Morpheus file-sharing application) is a peer-to-peer (P2P) technology firm which licensed or created software that allowed users to search for the internet, download or share multimedia files in digital format.

Timberline Venture Partners is a venture capital firm (Northwest subsidiary of Draper Fisher Jurvetson) that was a pioneer participant in StreamCast.

The litigation was focused on copyright infringement liability of StreamCast (via it’s Morpheus networks) as well as whether or not the actions and actions of StreamCast and its investors/backers permitted secondary liability for inducing copyright infringement. A key issue to be answered was if Timberline (as a major shareholder or board participant) might be responsible or had pertinent documents and an involvement (though Timberline was not named as a principal defendant in the huge copyright litigation).

Key Allegations & Legal Issues

Inducement of Copyright Infringement

In the case that is a landmark Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd. (2005) the U.S. Supreme Court held that a company that sells an item or service with the intention of encouraging copyright infringement by other parties could be held liable for the infringement (so-called “inducement” liability). The court ruled that the distribution of a device or service with intent to promote infringement is enough.
The StreamCast instance (which in the case of StreamCast, where the court ruled in favor of the plaintiffs a summary judgment the plaintiffs against StreamCast’s responsibility) the court concluded that the evidence suggested that StreamCast had a goal to encourage infringing and targeted users of Napster, relied on a high volume of infringing but did not put in place filters, etc.

Role of Timberline/Venture Capital Support

While Timberline was not directly sued in the request for summary judgement, the documents made through Timberline Venture Partners was included in the court record in StreamCast’s evidence -the documents – e.g., Exhibit 17 in the court record was comprised of documents prepared by Timberline. The court’s discussion on admissibility and authenticity pointed out the fact that Timberline was StreamCast’s principal investor.
Particularly specifically, the court in this decision ruled: “Exhibits 16 and 17 … were not produced by StreamCast in discovery but by its public relations firm … and its primary venture-capital investor, Timberline Venture Partners.”
This is important because it demonstrates that Timberline’s role was not that of a passive investor. They created documents and were involved in an internal chain of communications as well as materials which plaintiffs utilized to prove intention and understanding.

Business Model and Intent

The court’s summary judgement opinion declares that StreamCast’s model of business relied on the high volume of file-sharing the company’s internal presentations highlighted “no product costs to acquire music” and “ability to get all the music,” and that the company was geared towards Napster users.
The court also highlighted emails from StreamCast’s top executives that stated things such as “We do not care what was on those files … we only cared that we were able to compare ourselves favourably with the much larger … Napster.”
The question of intent (to facilitate infringing usage) was firmly raised by plaintiffs.

Investor Liability and Board/VC Role

While the main suit was is focused on StreamCast Timberline’s role as an investor/partner Timberline as an investor/partner raises questions of whether an investor could be accountable for their the involvement or encouragement of violating conduct. Courts will examine aspects like the extent to which an investor participated in board or corporate control decision-making? Did the investor receive notices revealing that it was infringing? promote or directly influence business models that rely on the infringing usage.
The StreamCast decision, the documents created by Timberline were accepted as evidence of the intent and knowledge of StreamCast. The court said that since Timberline was a business associate and investor and investor, the documents it created could be verified and utilized.

Legal Developments & Status

In the specific case (MGM v. Grokster/Grokster-type inducement claims against StreamCast) the court granted summary judgment against StreamCast for inducement liability.
The court’s decision is as follows: “This Court GRANTS Plaintiffs’ motion for summary judgment as to StreamCast’s liability for inducing copyright infringement through MusicCity/OpenNap and Morpheus.”
This means that StreamCast was held accountable at the time of summary judgment and liability was determined prior to trial.
The function that Timberline played in the case of Timberline as a distinct defendant is not apparent from sources that are publicly available: Timberline itself was not the defendant in the case (at at least, not according to the sources we found). Since the documents of Timberline were utilized, the involvement of Timberline is important from a risk-taking perspective for investors who invest in similar businesses.

Why It Matters

For Investors and VCs

This is a cautionary tale investing in a business which’s model of business is dependent on the mass sharing of infringing content could be a risk to not just the business but potential investors (or at the very least prompt the production of documents and scrutiny). Investors must conduct thorough due diligence to check that the business model is legal and that policies are implemented regarding the use of infringing content as well as licensing, filtering, and filtration.

For Technology Companies

Any business that distributes peer-to-peer or file-sharing platforms for sharing content must be aware of the legal risks involved in distribution: dissemination of technology isn’t necessarily illegal, but should the company distribute it for the purpose of encouraging infringement, then liability could arise under the inducement doctrine. The StreamCast case demonstrates that courts will look at internal communications, motives for business models marketing to a libelous users, and the failure to enforce filtering or other measures.

For Copyright Holders

The decision confirms that copyright holders can pursue secondary responsibility (inducement) not just against direct infringers, but as well against technology distributors which rely heavily on the use of infringing technology.

For the Broader Ecosystem

The case illustrates the way in which lawful frameworks for the distribution of digital content as well as user-generated content and peer-to-peer networks is still in place and relevant. It also highlights the importance of a solid business model that relies on the use of infringing content might not be legal it is technically feasible.

Key Legal Takeaways

• The intent of the message is important The defendant’s internal strategy for business and the way it communicates violating use can be the basis for liability for inducement.
• The volume of infringing usage is important in StreamCast research, studies revealing that 87%+ of files on the network that are likely infringing were part evidence.
• Document production risk for investors If the investor isn’t named as the primary defendant, the documents and communications could be part of the records if the investor is heavily involved.
• Filtering/enforcement deficiency: A company that fails to implement reasonable steps to prevent infringing use may signal intent and thus face liability.
• Business model dependence: If a business’s revenue model relies on the utilization of a technology which allows infringement, courts could determine that the company is illegal.

Limitations & Considerations

• The ruling doesn’t not suggest that all peer-to -peer or file-sharing companies are automatically responsible for infringement; the most important thing is the desire to spread violation and the commercial model.
• The involvement of investors does not always create risk of liability. The courts will examine the control, communication and the role of an board member or investor.
• The legal proceedings are complex. the summary judgment ruling was focused on a single party (StreamCast) as well as the larger implications for investors such as Timberline are not as clear as reported by the media.
• Different jurisdictions might have different ways of addressing second liability as well as inducement, therefore that the U.S. context may differ from those of other countries.

Conclusion

The case involving Timberline Venture Partners’ investment in StreamCast Networks and the resulting litigation involving StreamCast’s Morpheus software can provide significant lessons on U.S. digital-copyright law and the risk of investing. For companies working on content-sharing technology as well as investors who are backing their efforts, and for copyright holders who enforce rights, this case shows the ways in which business strategy, marketing and business models, as well as internal communications can affect the lawful liability. Although Timberline is not named as a principal defendant in the summary judgment decision however, its role as an document producer and investor demonstrates how tightly linked the involvement of investors is when it comes to high-risk technological ventures.