Shelter Capital

Case: 09-55902 06/03/2010 Page: 1 of 65 ID: 7359483 DktEntry: 26
No. 09-55902
IN THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT
UMG RECORDINGS, INC., et al.,
Plaintiffs-Appellants
v.
SHELTER CAPITAL PARTNERS, LLC, et al.,
Defendants-Appellees.
On Appeal from the United States District Court

for the Central District of California, Western Division—Los Angeles
Hon. A. Howard Matz, District Judge
No. 07-cv-05744
CONSOLIDATED ANSWERING BRIEF OF DEFENDANTS-APPELLEES

SHELTER CAPITAL PARTNERS, LLC, SHELTER VENTURE FUND,
L.P., SPARK CAPITAL, LLC, SPARK CAPITAL, L.P., AND THE
TORNANTE COMPANY LLC
Robert G. Badal Glen Kulik

Joel Cavanaugh Alisa S. Edelson
Emily S. Churg KULIK, GOTTESMAN, MOUTON &
WILMER CUTLER PICKERING SIEGEL, LLP
HALE AND DORR LLP 15303 Ventura Boulevard, Suite 1400
350 South Grand Avenue, Suite 2100 Sherman Oaks, CA 91403
Los Angeles, CA 90071
ATTORNEYS FOR DEFENDANTS–
ATTORNEYS FOR DEFENDANTS– APPELLEES SPARK CAPITAL,
APPELLEES SHELTER CAPITAL LLC, SPARK CAPITAL, L.P., AND
PARTNERS, LLC AND SHELTER THE TORNANTE COMPANY LLC
VENTURE FUND, L.P.
US1DOCS 7561226v2
CORPORATE DISCLOSURE STATEMENT
Pursuant to Rule 26.1 of the Federal Rules of Appellate Procedure,
Defendants-Appellees Shelter Capital Partners LLC, Shelter Venture Fund, L.P.,
Spark Capital LLC, Spark Capital L.P., and The Tornante Company, LLC have no
parent corporations and no publicly held corporation owns 10% or more of their
stock.
US1DOCS 7561226v2
TABLE OF CONTENTS
Page
COUNTER STATEMENT OF ISSUE PRESENTED ............................................ 1
STATEMENT OF FACTS ..................................................................................... 2
I. PROCEDURAL BACKGROUND ............................................................... 2
II. UMG’S ALLEGATIONS AND THE DISTRICT COURT’S

DISMISSALS OF THE FIRST AND SECOND AMENDED
COMPLAINTS. ........................................................................................... 5
A. UMG’s Allegations And The District Court’s Dismissal Of The

First Amended Complaint................................................................... 5
B. UMG’s Allegations And The District Court’s Dismissal Of The

Second Amended Complaint. ............................................................. 8
SUMMARY OF ARGUMENT ............................................................................ 12
ARGUMENT ....................................................................................................... 19
III. STANDARD OF REVIEW ........................................................................ 19
IV. THE DISTRICT COURT RIGHTLY DISMISSED THE SAC, WHICH

RESTED UPON UNPRECEDENTED THEORIES OF SECONDARY,
AND PERHAPS TERTIARY, LIABILITY FOR VENTURE CAPITAL
INVESTORS.............................................................................................. 20
A. Under UMG’s Theories Of Secondary Copyright Infringement,

Liability Could Be Expanded To Any Defendant That Invested In
And Designated A Board Member To An Otherwise Lawful
Enterprise That Is Itself Alleged To Be An Infringer. ....................... 20
B. The District Court Correctly Held That UMG’s Theories Of

Secondary Liability Threatened To Weaken Longstanding
Principles Of Corporate Governance. ............................................... 25
V. UMG’S SECOND AMENDED COMPLAINT DID NOT ALLEGE

ANY FACTS UPON WHICH SECONDARY LIABILITY COULD BE
BASED. ..................................................................................................... 31
-i-
US1DOCS 7561226v2
A. The District Court Was Correct In Holding That UMG Failed To

State A Claim For Vicarious Copyright Infringement Against Any
Of The Investor Defendants.............................................................. 31
1. UMG Failed To Establish That Each Investor Defendant

Had The Right And Ability To Supervise Veoh’s Alleged
Infringing Activity.................................................................. 32
2. UMG Failed To Establish That Any Of The Investor

Defendants Have A Direct Financial Interest In The
Allegedly Infringing Activities. .............................................. 36
B. The District Court Correctly Held That UMG Failed To State A

Claim For Contributory Copyright Infringement Against Any Of
The Investor Defendants................................................................... 40
1. UMG Failed To State Facts Sufficient To Allege That Any

Of The Investor Defendants Materially Contributed To
Veoh’s Alleged Copyright Infringement................................. 41

Of The Investor Defendants Had Actual Knowledge Of
Veoh’s Alleged Infringing Activity. ....................................... 47
C. The District Court Was Correct in Dismissing UMG’s Claim for

Inducement To Infringe Copyright. .................................................. 48
1. The District Court Correctly Found That Liability For

Inducement To Infringe Under Grokster Requires The
Distribution Of A Device Or Product. .................................... 48
2. UMG Failed To Establish That The Investor Defendants

Induced Veoh To Infringe Copyright...................................... 51
VI. CONCLUSION .......................................................................................... 53
CERTIFICATE OF COMPLIANCE .................................................................... 55
STATEMENT OF RELATED CASES ................................................................ 56
- ii -
US1DOCS 7561226v2
TABLE OF AUTHORITIES
Federal Cases
A&M Records, Inc. v. Napster, Inc.,

114 F. Supp. 2d 896 (N.D. Cal. 2000) ......................................................... 38, 43
A&M Records, Inc. v. Napster, Inc.

239 F.3d 1004 (9th Cir. 2001) .................................................................... passim
Arc Ecology v. U.S. Dep't of Air Force,

411 F.3d 1092 (9th Cir. 2005) ...........................................................................20
Ashcroft v. Iqbal,
129 S. Ct. 1937 (2009) .......................................................................... 19, 20, 50
Balistreri v. Pacifica Police Dep't,

901 F.2d 696 (9th Cir. 1990) .............................................................................19
Bell Atl. Corp. v. Twombly,

550 U.S. 544 (2007) ..........................................................................................50
Broadcast Music, Inc. v. Hartmarx Corp.,

No. 88 C 2856, 1988 U.S. Dist. LEXIS 13298 (N.D. Ill. Nov. 17, 1988)...........40
City of Arcadia v. U.S. Envtl. Prot. Agency,

411 F.3d 1103 (9th Cir. 2005) ...........................................................................19
Columbia Pictures Indus., Inc. v. Redd Horne, Inc.,

749 F.2d 154 (3d Cir. 1984) ..............................................................................28
Ellison v. Robertson,
357 F.3d 1072 (9th Cir. 2004) ..................................................................... 17, 40
Fields v. Legacy Health Sys.,

413 F.3d 943 (9th Cir. 2005) .............................................................................32
Fonovisa v. Cherry Auction, Inc.,

76 F.3d 259 (9th Cir. 1996) ........................................................................ passim
In re First Alliance Mortgage Co.,

471 F.3d 977 (9th Cir. 2006) .............................................................................29
- iii -
US1DOCS 7561226v2
Knievel v. ESPN,
393 F.3d 1068 (9th Cir. 2005) ...........................................................................19
M. Lady, LLC v. AJI, Inc.,

No. 06 CIV 0194, 2007 U.S. Dist. LEXIS 69209 (S.D.N.Y. Sep. 19, 2007)......39
Metge v. Baehler,
762 F.2d 621 (8th Cir. 1985) .............................................................................29
Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd.,

545 U.S. 913 (2005) ................................................................................... passim
Neilson v. Union Bank of California,

290 F. Supp. 2d 1101 (C.D. Cal. 2003) .............................................................30
Orthokinetics, Inc. v. Safety Travel Chairs, Inc.,

806 F.2d 1565 (Fed. Cir. 1986) .........................................................................29
Perfect 10, Inc. v. Amazon.com, Inc.,

487 F.3d 701 (9th Cir. 2007) ....................................................................... 46, 52
Perfect 10, Inc. v. Visa Int'l Serv. Ass'n,

494 F.3d 788 (9th Cir. 2007) ....................................................................... 25, 44
RCA/Ariola Int'l, Inc. v. Thomas & Grayson Co.,

845 F.2d 773 (8th Cir. 1988) .............................................................................39
Shapiro, Bernstein & Co. v. H.L. Green Co.,

316 F.2d 304 (2d Cir. 1963) ..............................................................................32
Stanford Univ. Hosp. v. Fed. Ins. Co.,

174 F.3d 1077 (9th Cir. 1999) ...........................................................................25
Transgo, Inc. v. Ajac Transmission Parts Corp.,

768 F.2d 1001 (9th Cir. 1985) ...........................................................................28
U.S. v. Best Foods,

524 U.S. 51 (1998) ............................................................................................28
UMG Recordings et al. v. Veoh Networks, Inc.,

665 F. Supp. 2d 1099 (C.D. Cal. 2009) ...................................................... passim
- iv -
US1DOCS 7561226v2
UMG Recordings, Inc. v. Bertelsmann AG,

222 F.R.D. 408 (N.D. Cal. 2004)..................................................... 22, 23, 39, 45
State Cases
Agostino v. Hicks,
845 A.2d 1110 (Del. Ch. 2004) .........................................................................27
Grosset v. Wenaas,
42 Cal.4th 1100 (2008)......................................................................................27
Federal Statutes
17 U.S.C. § 512(c)........................................................................................ 2, 3, 24
Federal Rules
Federal Rule of Civil Procedure 12(b)(6)............................................................1, 3
Other
3 Melville B. Nimmer & David Nimmer, Nimmer on Copyright

§ 12.04[A][5][a] (2007)............................................................................... 21, 43
-v-
US1DOCS 7561226v2
COUNTER STATEMENT OF ISSUE PRESENTED
1. Whether the District Court correctly dismissed with prejudice
pursuant to Federal Rule of Civil Procedure 12(b)(6) Plaintiffs-Appellants’ claims
against Defendants-Appellees for vicarious copyright infringement, contributory
copyright infringement, and inducement of copyright infringement where Plaintiff-
Appellants’ theory of secondary liability alleged in the Second Amended
Complaint amounted to asserting that (1) Defendants-Appellees invested in a
lawfully-operating company accused of copyright infringement; (2) Defendants-
Appellees selected individuals to serve on the Board of Directors of that company;
and (3) those Board members individually engaged in conduct consistent with their
duties as corporate Board members?
-1-
US1DOCS 7561226v2
STATEMENT OF FACTS
I. PROCEDURAL BACKGROUND
On September 4, 2007, Universal Music Group (“UMG”)1 filed this action
against Veoh Networks, Inc. (“Veoh”) alleging direct and secondary copyright
infringement against Veoh, a website service provider. See Record Excerpt (“RE”)
121; Supplemental Record Excerpt (“SRE”) 1. UMG alleged that Veoh’s website
infringed UMG’s copyrighted works by allowing consumers to post content that
became available to other consumers for streaming and downloading. RE 121-22;
SRE 2-3 (Compl. ¶¶ 2-4).2
UMG also alleged in its initial complaint that certain companies, including
Shelter Capital LLC, Spark Capital LLC, and The Tornante Company, LLC (the
“Investor Defendants”), provided venture funding to Veoh, and that individuals
selected by these investor entities served on Veoh’s Board of Directors. RE 122;
SRE 7 (Compl. ¶ 14). UMG purported to reserve its right to add Veoh’s investors
as defendants “once the full nature and extent of their contribution to, and
1
The Plaintiffs-Appellants, subsidiaries of Vivendi, will be referred to herein for
convenience in the singular as “UMG.”
2
In a ruling that is the subject of a parallel appeal in this Court, on September 11,
2009, the District Court granted summary judgment in Veoh’s favor under the safe
harbor provisions of the Digital Millennium Copyright Act for service providers.
17 U.S.C. § 512(c). See UMG Recordings et al. v. Veoh Networks, Inc., 665 F.
Supp. 2d 1099, 1101 (C.D. Cal. 2009).
-2-
US1DOCS 7561226v2
facilitation of, the infringing conduct taking place on Veoh is known.” RE 122;
SRE 7 (Compl. ¶ 14).
After taking discovery of the investor entities, UMG filed a motion for leave
to amend its complaint to add the Investor Defendants, purporting to base its
amendment on the factual material it obtained in discovery. See RE 122; SRE 7
(Compl. ¶ 14), 40, 41 (Golinveaux Decl. ¶¶ 3, 7), 42-84 (Ex. B to Golinveaux
Decl.), 86 (Sullivan Decl. ¶ 2), 90-103 (Ex. A to Sullivan Decl.). The District
Court granted UMG’s motion for leave to amend, and on August 26, 2008, UMG
filed its first amended complaint (“FAC”) alleging claims for contributory
infringement of copyright, vicarious infringement of copyright, and inducing
copyright infringement against the Investor Defendants. RE 97 (FAC Counts II-
IV). Each of these secondary liability claims made against the Investor Defendants
were premised upon the alleged primary (or secondary) copyright liability of Veoh.
On October 16, 2008, the Investor Defendants filed a motion to dismiss all
of UMG’s claims against them in the FAC for failure to state a claim under Federal
Rule of Civil Procedure 12(b)(6).
On December 29, 2008, the District Court determined that Veoh’s website
services were the type of definitional services that fell within the scope of the “safe
harbor” provisions of the Digital Millennium Copyright Act (“DMCA”), 17 U.S.C.
§ 512(c). See UMG Recordings, 665 F. Supp. 2d at 1101.
-3-
US1DOCS 7561226v2
On February 2, 2009, the District Court granted the Investor Defendants’
Motion to Dismiss the FAC. Although the court granted the motion “without
prejudice,” it strongly cautioned UMG against filing a Second Amended
Complaint. RE 27.
Despite the District Court’s warning, UMG proceeded to amend its
complaint and filed its second amended complaint (“SAC”) on February 23, 2009.
RE 50. The Investor Defendants timely moved to dismiss the SAC on March 2,
2009. RE 3; SRE 104-181.
Recognizing that the SAC was functionally indistinguishable from the FAC,
and thus equally defective, the District Court dismissed the claims against the
Investor Defendants with prejudice on May 5, 2009. RE 4, 9, 17. This appeal
ensued.
Thereafter, on September 11, 2009, the District Court determined that Veoh
met all the proof elements of the “safe harbor” provisions of the DMCA and
granted Veoh’s motion for summary judgment with regard to the “safe harbor”
defense. UMG Recordings, 665 F. Supp. at 1101.3
3
The Investor Defendants alleged liability is entirely derivative of Veoh’s liability.
Accordingly, if this Court on appeal sustains the District Court’s summary
judgment holding that Veoh is entitled to “safe harbor” protections under the
DMCA, it should also sustain the District Court’s dismissal of the claims against
the Investor Defendants as well.
-4-
US1DOCS 7561226v2
II. UMG’S ALLEGATIONS AND THE DISTRICT COURT’S

DISMISSALS OF THE FIRST AND SECOND AMENDED
COMPLAINTS.
A. UMG’s Allegations And The District Court’s Dismissal Of The

First Amended Complaint.
In the FAC, UMG based its theories of secondary liability on allegations that
the Investor Defendants provided Veoh with venture funding, and that they might
ultimately benefit financially from Veoh’s alleged infringement should Veoh
increase in value. See RE 104, 111-112 (FAC ¶¶ 16, 30, 31, 32). UMG further
alleged that as a condition of their venture investment, each of the Investor
Defendants selected an individual to sit on Veoh’s Board of Directors. UMG
attempted to bolster these bare-bones allegations with a thin veneer of other
allegations, such as the allegations that Veoh’s Board held one or more of its
meetings at the offices of one of the Investor Defendants, RE 99-100, 104, 111-
112 (FAC ¶¶ 4, 16, 30, 31, 32), and that the Investor Defendants (who held three of
Veoh’s five board seats) “used their investments and board seats to control and
make all important operational decisions at Veoh,” including decisions regarding
what content would be available on Veoh’s site, whether to employ filters to limit
copyrighted materials on Veoh’s site, how to monetize Veoh’s business, and the
selection and hiring of employees. RE 104, 111-112 (FAC ¶¶ 16, 30, 31, 32).
UMG also alleged in a conclusory fashion that the Investor Defendants: (1) knew
“full well that the site displayed and distributed copyrighted works without
-5-
US1DOCS 7561226v2
appropriate licenses, and [knew] full well that Veoh’s users used Veoh to engage
in massive copyright infringement”; (2) “know, should know, and/or with
reasonable diligence could ascertain, many of the audiovisual works on Veoh’s
website contain copyrighted material”; and (3) “have and continue to knowingly
and systematically materially contribute to, intentionally induce, and/or cause
unauthorized reproductions, adaptations, distributions and/or public performances”
of UMG’s works. RE 100, 110, 114 (FAC ¶¶ 5, 28, 42).
The District Court held these allegations to be insufficient as a matter of law
to sustain any of UMG’s secondary liability claims against any of the Investor
Defendants, for several reasons. First, the District Court refused to embrace
UMG’s theory that liability could arise from normal acts of corporate governance,
ruling that the FAC’s allegations essentially amounted to no more than what was to
be expected of board members. RE 20 (Feb. 2, 2009 Order 3). The District Court
further explained that “membership on a Board of Directors necessarily and
inherently entails making almost all these ‘decisions,’” and that the FAC’s
“descriptions of how the Investor Defendants exercised control are the equivalent
of ‘plain vanilla’ characterizations of what directors ordinarily do . . . and are
expected to do.” RE 22-23 (Feb. 2, 2009 Order 5-6).
Second, the District Court found that UMG’s allegations referenced the
actions of Veoh’s individual Board members, not the Investor Defendants
-6-
US1DOCS 7561226v2
themselves, and failed to sufficiently allege the Investor Defendants’ control over
those actions or otherwise connect the Investor Defendants to them. RE 24
(Feb. 2, 2009 Order 7).
Third, the District Court held that UMG had independently failed to
adequately allege the basic elements of any of its three theories of secondary
liability. As to UMG’s vicarious liability claim, the District Court held that UMG
failed to plead that the Investor Defendants had a direct financial interest in Veoh’s
infringement, finding that the indirect financial benefit of possibly selling Veoh in
the future “is too far removed from the alleged infringement to be considered a
‘direct’ financial interest.” RE 26 (Feb. 2, 2009 Order 9). Regarding UMG’s
contributory infringement claim, the District Court found UMG’s allegations of
material assistance insufficient, because the Board members’ alleged actions were
within the scope of their ordinary duties as board members, and UMG failed to
demonstrate the Investor Defendants’ control over these actions. RE 22-24 (Feb.
2, 2009 Order 5-7). Lastly, the District Court held that the FAC failed to state a
claim for inducement to infringe copyright because it lacked allegations that the
Investor Defendants actively encouraged direct infringement by Veoh or Veoh’s
users in connection with use or distribution of an infringing device. RE 27 (Feb. 2,
2009 Order 10).
-7-
US1DOCS 7561226v2
B. UMG’s Allegations And The District Court’s Dismissal Of The

Second Amended Complaint.
Despite the District Court’s admonishment against filing another amended
complaint, UMG filed the SAC. The new allegations consisted almost entirely of
reiterations and elaborations of the allegations in the FAC that the District Court
already deemed deficient. In dismissing the SAC with prejudice, the District Court
revisited the allegations in the FAC, and noted that “[i]n its February 2, 2009
Order, the [District] Court found that these allegations amounted to little more than
what is legally and customarily required of corporate board members and that they
were insufficient to establish claims of contributory infringement, vicarious
infringement, or inducement to infringe.” RE 4 (May 5, 2009 Order 2).
Regarding the Investor Defendants’ funding of Veoh and purported future
financial benefit from the alleged infringement, UMG’s new allegations were
identical to those in the FAC, reiterating its claim that the Investor Defendants
were acting to maximize their investment because they might one day sell Veoh—
an allegation already made in the FAC, and rejected as insufficient. RE 57, 64-66,
70-71 (SAC ¶¶ 16, 30, 31, 32, 40). Further, UMG added absolutely no new
allegations addressing the Investor Defendants’ appointment of members to Veoh’s
Board. See RE 52-53, 57, 64-65 (SAC ¶¶ 4, 16, 30, 31).
Unable to allege new facts demonstrating that the Investor Defendants
themselves controlled, assisted, or directly benefitted from Veoh’s infringement,
-8-
US1DOCS 7561226v2
nearly all of the new allegations in the SAC were merely anecdotal elaborations on
the isolated actions of the individual members of Veoh’s Board and not those of
the Investor Defendants themselves. RE 65-69 (SAC ¶¶ 32-35, 37, 38). Yet even
these anecdotal allegations were innocuous and did not allege any specific
wrongdoing on the part of the individual Board members, let alone the Investor
Defendants. See, e.g., RE 65-66 (SAC ¶ 32) (Spark’s designee gave press
statements); RE 66 (SAC ¶ 33) (Shelter’s designee “confirmed that the subject of
‘copyright matters’ was to be considered by the Board”); RE 66-67 (SAC ¶ 34)
(notes from a Board meeting reflect that “[o]ther video sharing sites have a 10-15%
drop in traffic when fingerprinting is implemented. Veoh expects to have . . . more
of a drop-off”); RE 67-70 (SAC ¶¶ 35, 39) (Spark, Tornante, and Shelter’s
designees were told that Veoh’s site contained copyrighted materials); RE 68-69
(SAC ¶ 37) (Tornante’s designee asked Veoh’s CEO to look into the copyright
status of certain videos on the Veoh site); RE 69 (SAC ¶ 38) (notes from a Board
meeting disclose that Veoh hired individuals to manually remove adult content);
RE 66-68, 71 (SAC ¶¶ 34, 36, 41) (Time Warner, another Veoh investor unrelated
to the Investor Defendants, “force[d]” Veoh to implement filtering technology on
its site). None of these allegations was sufficient to demonstrate that the Investor
Defendant entities themselves engaged in any specific conduct that would meet the
pleading requirements for secondary copyright liability.
-9-
US1DOCS 7561226v2
Summarizing the new allegations UMG added to the SAC, the District Court
concluded:
Although these allegations are titillating insofar as they offer a

glimpse into the inner workings of Veoh and its Board of
Directors, they boil down to allegations that overlap almost
entirely with the allegations of the FAC.
RE 8 (May 5, 2009 Order 6).
The District Court continued: “[T]he only allegations that are arguably new
are that the Investor Defendants’ principals sometimes acted as the ‘public face’ of
Veoh, and that the Board considered copyright matters. But these allegations do
not support UMG’s infringement claims.” RE 9 (May 5, 2009 Order 7). With
regard to the “public face” allegations, the District Court determined that “[n]either
of these allegations suggest anything unlawful,” and in response to the Board’s
consideration of copyright allegations, noted that “[i]f the Board had not
considered copyright matters, UMG would likely claim that it had been derelict in
its duties.” Id. Lastly, the District Court concluded that it was “not willing to
expand the scope of copyright liability in a manner that presents a substantial risk
of upending well-established concepts of corporate governance.” RE 17 (May 5,
2009 Order 15). It stated:
UMG’s proposed extension of [secondary copyright liability]

principles would likely invite a wholesale weakening of the no
less important principle that the corporate form is meant to
protect shareholders, directors and officers from ordinary
liability. . . . The vast and rapid expansion of software
- 10 -
US1DOCS 7561226v2
technology in telecommunications is generally beneficial to our

economy and society, and we should not erect obstacles to that
growth in the absence of sound legal and policy-based reasons.
Id.
In sum, as the District Court correctly found, UMG’s attempts to cure the
deficiencies identified in the February 2, 2009 Order failed. Not only did UMG’s
additional allegations have no direct relation to the Investor Defendants’ purported
copyright liability, but they also repeatedly lumped all of the Investor Defendants
together and treated them and the individual Board members as one entity with one
collective state of mind. The District Court rightly rejected this approach. RE 24
(Feb. 2, 2009 Order 7). As the District Court properly found, these types of
allegations did nothing to show that the Investor Defendants themselves, as entities
distinct from Veoh and its Board, were involved in any of the types of conduct that
would lie at the core of secondary copyright liability. Because UMG, having had
ample opportunity to take documentary and deposition discovery, was unable to
allege facts sufficient to make out claims for secondary liability, the District Court
dismissed its claims with prejudice. RE 9 (May 5, 2009 Order 7).
- 11 -
US1DOCS 7561226v2
SUMMARY OF ARGUMENT
After taking extensive discovery, UMG was given two opportunities in the
District Court to allege facts sufficient to survive a motion to dismiss, and failed
both times. Each time the District Court dismissed UMG’s claims against the
Investor Defendants for secondary copyright infringement, it rightly recognized
that UMG’s theories of liability both turned doctrines of corporate governance on
their head as well as exceeded the bounds of any reading of prevailing copyright
case law and, if accepted, would have expanded to third parties the reach of
secondary copyright liability in unprecedented ways.
Although UMG has gone to great lengths to camouflage its theories of
liability behind a semantic cloak, it is clear that UMG’s allegations would impose
third party liability where it had not existed before. UMG’s theories of secondary
copyright liability against the Investor Defendants rested almost entirely on a
limited set of factual allegations: (1) the Investor Defendants provided Veoh with
funding; (2) the Investor Defendants each selected an individual to sit on Veoh’s
Board; and (3) those individual Board members made public pronouncements or
engaged in deliberations regarding various aspects of Veoh’s business.
As the District Court found, there are at least two fundamental flaws in
UMG’s attempts to create a novel theory of secondary liability out of this fact
pattern. First, the SAC makes no distinction between the actions of the three
- 12 -
US1DOCS 7561226v2
named Investor Defendant entities, the isolated actions of the individual members
of Veoh’s Board, and the actions of Veoh’s entire Board as a collective decision-
making body within Veoh. The Investor Defendants are each separate legal
entities, and UMG was never able to allege that they did anything other than invest
in Veoh and select members for Veoh’s Board. The remainder of UMG’s
allegations were aimed at innocuous anecdotes related to individual members of
Veoh’s Board or at the due-course deliberations at Board meetings. As the District
Court ruled, such allegations, if permitted to survive, would “expand the scope of
copyright liability in a manner that presents a substantial risk of upending well-
established concepts of corporate governance.” RE 17 (May 5, 2009 Order 15).
UMG has never cogently explained how its various allegations against Veoh or its
Board members—largely unfounded or innocuous allegations in any event—could
be imputed to the separate Investor Defendants.
Second, even if there were a legal basis for UMG’s lumping of the three
Investor Defendant entities, their three individual designees on Veoh’s Board, and
Veoh’s five-member Board itself into a single entity supposedly acting pursuant to
a common plan, UMG’s secondary liability allegations against the Investor
Defendants still failed. As determined by the District Court, and as the Investor
Defendants demonstrated below, for each of the three theories of secondary
- 13 -
US1DOCS 7561226v2
copyright liability UMG alleged, UMG failed to adduce facts that would support
the required elements of each type of secondary liability:
● Under this Circuit’s precedent, vicarious liability can be imposed only
upon a showing that the defendant had a “direct financial interest in” and the “right
and ability to control” the infringing activity. Although the case law clearly
defines “direct” financial interest to consist of fees, payments or other
remuneration paid directly to the secondary infringer, all UMG could muster was a
generalized allegation that the Investor Defendants had a long-term “financial
interest” in Veoh. RE 57 (SAC ¶ 16). As the District Court found, this claim was
far too removed to constitute a “direct” financial benefit or interest under
established case law. RE 14-16 (May 5, 2009 Order 12-14). Moreover, UMG
argued without support that the mere fact of board membership, or, more
accurately, the fact of designating an individual to sit on a corporation’s board,
meant that the designating venture investor automatically had the right and ability
to supervise infringing activity allegedly engaged in by the underlying company.
Again, no case law supported this far-reaching proposition.
● In this Circuit, contributory infringement arises at best only if the
defendant “causes or materially contributes” to the infringing activity with direct
“knowledge” of it. Here, again, UMG comes up short. Although UMG alleged
that certain of the individuals on Veoh’s Board had knowledge of some aspects of
- 14 -
US1DOCS 7561226v2
Veoh’s alleged infringement, nowhere in its SAC did UMG allege that the Investor
Defendants, as distinct entities from Veoh or their Board member designees, had
the types of direct knowledge required by the case law. UMG cited no authority
for the proposition that, for purposes of secondary copyright liability, the
knowledge, if any, of a Board member can be imputed to the Investor Defendants,
based on their status as investors or their selection of the individuals for the Board.
Nor did UMG cite any authority for the proposition that generalized knowledge of
infringing activity can serve as substitute for actual knowledge of specific acts of
infringement. Further, UMG’s attempt to allege that the Investor Defendants
“materially contributed” to Veoh’s infringement also fell short. In both its FAC
and SAC, UMG failed to allege that the Investor Defendants “directly provided the
mechanisms and instruments by which the alleged infringement was achieved”—
the types of conduct which formed the basis for liability in each of the cases upon
which UMG relied. See RE 12 (May 5, 2009 Order 10). Recognizing that it could
not allege that the Investor Defendants provided the “mechanisms and
instruments” that created infringement, UMG resorted to arguing that providing
funding was sufficient to create contributory liability. In rejecting UMG’s
argument that the Investor Defendants’ mere funding of Veoh should be considered
the functional equivalent of directly providing these mechanisms and instruments,
the District Court was correct that UMG’s assertion would be inconsistent with
- 15 -
US1DOCS 7561226v2
established precedent in this Circuit. See Fonovisa, Inc. v. Cherry Auction, Inc., 76
F.3d 250, 264 (9th Cir. 1996) (requiring one to “directly contribute[] to another’s
infringement” to be held liable for contributory infringement) (emphasis added).
To hold otherwise would stretch the limits of contributory infringement and
impose liability upon any third party who supported the alleged infringer’s ability
to operate its business.
● Liability for inducement to infringe requires a showing that the defendant
“distributed a device” with the “object of promoting” its use as an infringing
device. UMG could allege neither here. As the District Court found, UMG could
not possibly satisfy the “distribution of an infringing device or product” element of
such a claim. RE 16 (May 5, 2009 Order 14). Once again, the District Court
rejected the unprecedented argument that funding of a start-up venture was the
same as distributing a device. Id. UMG also failed to allege facts sufficient to
show that the Investor Defendants themselves engaged in a “clear expression or
other affirmative steps” to foster infringement. Id.; see Metro-Goldwyn-Mayer
Studios, Inc. v. Grokster, Ltd., 545 U.S. 913, 919 (2005).
As was clear in both the briefing below and in its Opening Brief in this
appeal, UMG is proposing theories of secondary liability that go well beyond the
confines of the case law. Although UMG argues that the terminology of secondary
liability can be reformulated to apply here, the fact of the matter is that the UMG’s
- 16 -
US1DOCS 7561226v2
theories are a rather transparent attempt to impose liability on third-party investors
in a fashion that would be unprecedented. Under UMG’s theories, venture funding
coupled with selection of board members and board deliberations would become
sufficient conditions for imposing secondary liability. Indeed, although UMG tries
to distance itself from the natural consequences of its theories of liability, the mere
act of funding a start-up would become the first element of proof in imposing
secondary liability on third parties. Disturbingly, UMG advances these theories in
the face of UMG’s admission that Veoh’s services had substantial non-infringing
uses, and despite the fact that Veoh qualified for “safe harbor” treatment under the
DMCA.4 In essence, UMG would have this Court impose liability on venture
entities who invested in a lawful internet enterprise. What UMG seeks to
accomplish here would not only be unprecedented but it would cast a pall over
venture funding and severely chill the ability of internet start-ups to obtain the
capital they require to compete with market incumbents. In passing the DMCA,
Congress intended to provide “greater certainty” to website service providers
regarding “their legal exposure for infringements that may occur in the course of
their activities.” Ellison v. Robertson, 357 F.3d 1072, 1076 (9th Cir. 2004)
4
Veoh’s services have posted millions of videos, while UMG alleges that only
“thousands” are infringing. See UMG Recordings, 665 F. Supp. 2d at 1101; RE 59
(SAC ¶ 22). Thus, even UMG must concede that Veoh’s services had substantial
non-infringing uses.
- 17 -
US1DOCS 7561226v2
(quoting S. Rep. 105-190, at 20 (1998); H.R. Rep. 105-551(II), at 49 (1998)).
Accepting UMG’s novel theories of secondary liability would run directly counter
to this purpose, subjecting would-be funders of website service providers to severe
uncertainty regarding their potential investments—resurrecting the very
uncertainty Congress sought to avoid in legislating the DMCA—and creating
greater obstacles to investment in the internet space. This Court should not accept
UMG’s invitation to extend secondary liability under the circumstances here.
- 18 -
US1DOCS 7561226v2
ARGUMENT
III. STANDARD OF REVIEW
This Court reviews de novo a dismissal for failure to state a claim under
Rule 12(b)(6) of the Federal Rules of Civil Procedure. Knievel v. ESPN, 393 F.3d
1068, 1072 (9th Cir. 2005). Dismissal is proper when there is a “lack of a
cognizable legal theory or the absence of sufficient facts alleged under a
cognizable legal theory.” City of Arcadia v. U.S. Envtl. Prot. Agency, 411 F.3d
1103, 1106 n.3 (9th Cir. 2005); Balistreri v. Pacifica Police Dep’t, 901 F.2d 696,
699 (9th Cir. 1990).
“To survive a motion to dismiss, a complaint must contain sufficient factual
matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’”
Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (quoting Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 (2007)). “A claim has facial plausibility when the
plaintiff pleads factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged.” Id. (citing
Twombly). The determination of “whether a complaint states a plausible claim to
relief” is “a context-specific task that requires the reviewing court to draw on its
judicial experience and common sense.” Id. at 1950. If “the well-pleaded facts do
not permit the court to infer more than the mere possibility of misconduct, the
- 19 -
US1DOCS 7561226v2
complaint has alleged—but it has not ‘show[n]’—‘that the pleader is entitled to
relief.’” Id. (quoting Fed. R. Civ. P. 8(a)(2)).
In addition, although a plaintiff’s allegations are generally taken as true, it is
well established that “[a] pleading that offers ‘labels and conclusions’ or ‘a
formulaic recitation of the elements of a cause of action will not do’ …. Nor does a
complaint suffice if it tenders ‘naked assertion[s]’ devoid of further factual
enhancement.’” Id. at 1949 (quoting Twombly, 550 U.S. at 555).
The Court also may affirm on any ground supported by the record, even if
the district court did not consider the issue. Arc Ecology v. U.S. Dep’t of Air
Force, 411 F.3d 1092, 1096 (9th Cir. 2005).
IV. THE DISTRICT COURT RIGHTLY DISMISSED THE SAC, WHICH

RESTED UPON UNPRECEDENTED THEORIES OF SECONDARY,
AND PERHAPS TERTIARY, LIABILITY FOR VENTURE CAPITAL
INVESTORS.
A. Under UMG’s Theories Of Secondary Copyright Infringement,

Liability Could Be Expanded To Any Defendant That Invested In
And Designated A Board Member To An Otherwise Lawful
Enterprise That Is Itself Alleged To Be An Infringer.
As the District Court correctly concluded, UMG’s theories of secondary
copyright liability would vastly expand the liability of third parties for the acts of
alleged direct infringers. As summarized above, the SAC sets forth a limited
paradigm of allegations against the three Investor Defendant entities: (1) they each
provided venture funding to an internet start-up company, Veoh, that engaged in
- 20 -
US1DOCS 7561226v2
lawful activity but also is alleged to have engaged in specific acts of copyright
infringement; (2) as a part of their investments in Veoh, they each selected an
individual to serve on Veoh’s Board of Directors; and (3) individual Board
members made public pronouncements and/or engaged in discussions regarding
various aspects of Veoh’s business. No court has imposed liability under any
theory of secondary copyright infringement based on this limited paradigm. And
for good reason, in that imposing liability under such circumstances would
undermine the well-established principle that secondary liability for copyright
infringement requires culpable conduct by the alleged secondary infringer that is
directly connected to the underlying acts of direct infringement.5 As the Supreme
Court observed in Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd., the
doctrine of secondary liability “limits liability to instances of more acute fault than
the mere understanding that some of one’s products will be misused.” 545 U.S.
913, 932-33 (2005). Nowhere in the SAC are there allegations about the Investor
5
Furthermore, it is worth noting that to the extent that UMG’s copyright
infringement claims against Veoh are based on theories of secondary copyright
infringement (with Veoh’s customers being the alleged direct infringers), UMG’s
claims against the Investor Defendants would, of necessity, then be based on
theories of “tertiary” copyright infringement (e.g., that the Investor Defendants
assisted Veoh in assisting its users’ infringement). No court has recognized any
such liability. See Melville B. Nimmer & David Nimmer, Nimmer on Copyright §
12.04[A][5][a] (2007) (expressing doubt as to whether tertiary liability is a
“cognizable” legal theory).
- 21 -
US1DOCS 7561226v2
Defendants that amount to “acute fault” on their part. Providing funding and
selecting board members are not themselves culpable acts.
UMG does not cite a single case—in either the so-called “brick and mortar
world” or the “internet world”—in which a court held that investing in a legitimate
business that has been accused of acts of infringement (and then selecting an
individual to serve and perform on that company’s board) was sufficient to
establish a claim for secondary copyright liability.6 UMG’s reliance on UMG
Recordings, Inc. v. Bertelsmann AG, 222 F.R.D. 408 (N.D. Cal. 2004), for the
proposition that an investor could potentially be secondarily liable for the direct
copyright infringement of the company in which it invested, is overstated and
misplaced. As the District Court here correctly recognized, the Bertelsmann
court’s holding—that the facts alleged in that case against two investors in Napster
were sufficient to state claims of secondary liability—was premised on far more
than UMG was capable of alleging here:
[I]n Bertelsmann the plaintiff alleged that Bertelsmann was

Napster’s only source of funding; that Bertelsmann decided to
keep the Napster service in operation even after Napster had
6
Despite its heated rhetoric, UMG has never denied that Veoh’s services had
substantial non-infringing content, and instead has alleged that only a small portion
of the videos posted to Veoh’s site are infringing. See UMG Recordings, 665 F.
Supp. 2d 1099; RE 59 (SAC ¶ 22). Moreover, as mentioned previously, the
District Court found that Veoh qualified for the DMCA’s “safe harbor” protections
by reason of its various and responsive efforts to protect the interests of copyright
holders. UMG Recordings, 665 F. Supp. 2d at 1110, 1112, 1118.
- 22 -
US1DOCS 7561226v2
been found to be engaging in infringing conduct [which, the

District Court noted, is not the case here, as Veoh has not been
found liable for direct infringement]; that Napster’s investors
caused Napster to engage in infringing conduct independently
of each other; and that the investors ordered infringing activity
to take place. No such allegations are made by UMG in this
case.
RE 12-13 (May 5, 2009 Order, 10-11). Furthermore, the Bertelsmann court noted
that the complaints at issue in that case contained “extensive allegations” of the
investors’ “direct involvement” in compelling Napster’s ongoing copyright
infringement, which the defendants were alleged to have carried out in spite of
(and with full knowledge of) a preliminary injunction entered by the District Court
shutting down Napster’s service based on its infringing activities. Bertelsmann,
222 F.R.D. at 413-14. Indeed, in Bertelsmann, the District Court was required to
go into great detail about the investors’ direct involvement in dictating and
compelling Napster’s infringing activity precisely because secondary liability
would not have attached to the investors in the absence of such direct and culpable
involvement. The holding in Bertelsmann, therefore, is wholly consistent with the
well-established principle that liability for secondary copyright infringement—
whether under a theory of contributory, vicarious, or inducement of
infringement—requires some purposeful, wrongful act that is directly related to the
underlying acts of direct infringement. UMG has not, and cannot, allege such acts
of direct culpable involvement by the Investor Defendants.
- 23 -
US1DOCS 7561226v2
Further, as the District Court here properly recognized, in light of the
DMCA’s “safe harbor” provision, 17 U.S.C. § 512(c), the vast expansion of
liability for secondary (and tertiary) copyright infringement that UMG urged upon
the Court would have resulted in alleged secondary infringers, even if removed
from the underlying direct infringement, being exposed to greater liability than the
service providers who themselves may qualify for a safe harbor. The District
Court explained:
Under the Digital Millennium Copyright Act’s “safe harbor”

provision, the liability of a service provider is generally limited
to a failure to remove specific works which have been identified
by copyright holders via the “notice and takedown” procedure.
See 17 U.S.C. § 512. The logic of UMG’s argument, which
lacks support in existing case law, would thus impose greater
liability on the Investor Defendants than on a service provider
that qualified for the safe harbor.
RE 13-14 (May 5, 2009 Order 11-12 n.5).
In Perfect 10, Inc. v. Visa International Service Association, this Court
likewise noted that the plaintiff’s over-aggressive secondary infringement theory,
if adopted, would give rise to a similar “anomalous result” under the DMCA by
imposing greater liability on a tangentially-involved third party than on a service
provider: “The result, under Perfect 10’s theories, would therefore be that a
service provider with actual knowledge of infringement and the actual ability to
remove the infringing material … is entitled to a safe harbor from liability, while
credit card companies with actual knowledge but without the actual ability to
- 24 -
US1DOCS 7561226v2
remove infringing material, would benefit from no safe harbor.” Perfect 10, Inc. v.
Visa Int’l Serv. Ass’n, 494 F.3d 788, 795 n.4 (9th Cir. 2007). In neither the District
Court nor in this appeal has UMG been able to square its broad theory of investor
secondary liability with the safe harbor provisions of the DMCA that protect
Veoh’s operations—the entity the investors capitalized.
For these reasons, the District Court—correctly—rejected the very premise
that lay at the core of UMG’s liability theories—i.e., that venture funding coupled
with board selection could become the platform for secondary liability.
B. The District Court Correctly Held That UMG’s Theories Of

Secondary Liability Threatened To Weaken Longstanding
Principles Of Corporate Governance.
In addition to espousing theories of secondary liability that went beyond
anything contemplated in the case law, UMG also advanced arguments in the court
below that would have fundamentally altered established tenets of corporate
governance law. UMG premised its theories of liability against the individual
Investor Defendants on the acts of Veoh’s Board members, a theory which upends
important and well-established distinctions between corporations, their board
members, and their investors. See, e.g., Stanford Univ. Hosp. v. Fed. Ins. Co., 174
F.3d 1077, 1086 (9th Cir. 1999) (“[A] corporation is ‘an entity separate and
distinct from its stockholders, with separate and distinct rights and liabilities …’”)
(citing In re John Koke Co., 38 F.2d 232, 233 (9th Cir. 1930)). Aside from
- 25 -
US1DOCS 7561226v2
allegations that the Investor Defendants provided venture funding to Veoh, UMG’s
SAC focused exclusively on the activities of the individual members of Veoh’s
Board. However, Veoh’s Board members are not named defendants in this
lawsuit, nor could they be based on anything UMG has alleged. Instead, UMG
brought suit against the Investor Defendants, corporate entities that are neither
Board members nor officers of Veoh, and attempted to hold them liable based not
on their own actions but on comments made by individual Veoh Board members
acting in their capacity as such. But there is no “guilt by association” theory of
secondary copyright liability. Not only is UMG’s theory of liability expansive and
unprecedented, it is all the more remarkable because UMG’s allegations about
what individual Board members said or did demonstrate no wrongdoing on the part
of Veoh’s Board members, let alone the Investor Defendants.
UMG attempted to gloss over the fact that it had made no allegations about
the defendants it actually named by alleging that the three individual board
members became a “controlling block” of directors that operated Veoh’s business
pursuant to an unspecified common plan. In dismissing these conclusory
allegations, the District Court rightly determined that the allegations of collective
“control” were deficient:
UMG’s allegations of “control” are based on the implied (but

not sufficiently alleged) premise that the Investor Defendants
agreed with each other to “operate” Veoh jointly, and that their
three director-designees were mere puppets who always voted
- 26 -
US1DOCS 7561226v2
pursuant to a master plan that the investors had devised, that

these director-puppets actually administered Veoh, bypassing
whoever constituted “management.”
RE 24 (Feb. 2, 2009 Order 7). Further, the District Court rightly concluded that
the specific “facts” UMG alleged to support its allegation that this “controlling
block” engaged in conduct that resulted in Veoh’s alleged infringement were
insufficient to allege secondary liability in any event and amounted to nothing
more than “titillating” details about the “inner workings of Veoh and its Board of
Directors.” RE 8 (May 5, 2009 Order 6).
None of the facts UMG alleged suggest that Veoh’s Board members did
anything other than engage in the types of decision-making and activities that are
legally and customarily required of corporate board members, including the hiring
of professional management to operate the company. RE 4, 9 (May 5, 2009 Order
2, 7). Indeed, it is well settled that the authority to manage Veoh’s affairs rested
solely with Veoh’s Board—not with the Investor Defendant entities that provided
Veoh with venture funding and designated individuals to serve on the Board. See
Grosset v. Wenaas, 42 Cal.4th 1100, 1108 (2008) (“The authority to manage the
business and affairs of a corporation is vested in its board of directors, not in its
shareholders … This includes the authority to commence, defend, and control
actions on behalf of the corporation.”) (citing Cal. Corp. Code § 300(a)); see also
Agostino v. Hicks, 845 A.2d 1110, 1115 (Del. Ch. 2004) (citing Del. Code Ann. tit.
- 27 -
US1DOCS 7561226v2
8, § 141). In neither the FAC nor the SAC was UMG able to muster any factual
assertions that the individual Board members did anything other than conduct
themselves in a manner consistent with their statutory obligations.
UMG cites several cases in its Opening Brief (at 56-58) for the proposition
that individual directors or officers can be liable for their participation in unlawful
corporate acts. These cases are inapposite for two compelling reasons. First, in
every one of the cases UMG cites, the named corporate officer or director was a
direct participant in the illegal acts alleged. Second, none of these cases stands for
the proposition that a board member’s alleged personal culpability can be imputed
to an entirely separate venture capital investment vehicle. See Transgo, Inc. v.
Ajac Transmission Parts Corp., 768 F.2d 1001, 1021 (9th Cir. 1985) (holding
president and shareholder of corporation individually liable for trademark and
copyright infringement where he played an “instrumental role” in infringement);
U.S. v. Best Foods, 524 U.S. 51, 65-66 (1998) (finding status as corporate officer
or director irrelevant where liability stems from the individual’s own tortious acts);
Columbia Pictures Indus., Inc. v. Redd Horne, Inc., 749 F.2d 154, 160-61 (3d Cir.
1984) (president and sole shareholder of direct infringer liable where he
participated “knowingly and significantly in the infringing activity, and ignored
repeated requests from the plaintiff that he cease and desist the activity”);
Orthokinetics, Inc. v. Safety Travel Chairs, Inc., 806 F.2d 1565, 1578-79 (Fed. Cir.
- 28 -
US1DOCS 7561226v2
1986) (holding that “corporate officers who actively aid and abet their
corporation’s infringement may be personally liable for inducing infringement
under § 271(b)”). Here, in contrast, UMG has brought suit not against Veoh’s
individual officers or directors—a suit that would, of course, be frivolous given the
fact that, as explained above, their conduct was appropriate and consonant with
their duties—but instead only against the Investor Defendant entities, without any
allegations whatsoever that these entities were actively and directly involved in
Veoh’s alleged infringement.
Similarly, the cases UMG cites regarding bank liability (Opening Brief 58-
60) are also inapposite because they involve situations where the banks themselves
actively assisted in an inherently unlawful scheme. Accordingly, UMG does not
allege—nor could it7—that Veoh was itself an inherently unlawful business and,
therefore, it cannot allege that the Investor Defendants furthered an inherently
unlawful scheme. See In re First Alliance Mortgage Co., 471 F.3d 977, 995 (9th
Cir. 2006) (holding bank can be liable for aiding and abetting if it “actually knew”
its actions were assisting a “fraudulent enterprise”); Metge v. Baehler, 762 F.2d
621, 625 (8th Cir. 1985) (holding bank could be liable for aiding and abetting
corporations it financed if it knew they were selling worthless thrift certificates,
and prolonged the business life of the corporation for its own benefit at the expense
7
See Footnote 4, supra.
- 29 -
US1DOCS 7561226v2
of the certificate holders); Neilson v. Union Bank of California, 290 F. Supp. 2d
1101, 1129 (C.D. Cal. 2003) (holding bank could be liable for aiding and abetting
a Ponzi scheme “by giving [the scheme’s manager] access to large sums of money
that kept his scheme afloat for a significant period of time”).
Recognizing the dangerous, unlimited expansion of secondary liability UMG
was seeking in this case, the District Court appropriately concluded that it was “not
willing to expand the scope of copyright liability in a manner that presents a
substantial risk of upending well-established concepts of corporate governance.”
RE 17 (May 5, 2009 Order 15). The District Court further found that “[a]lthough
the judicially-fashioned principles of secondary copyright liability serve an
important purpose, UMG’s proposed extension of these principles would likely
invite a wholesale weakening of the no less important principle that the corporate
form is meant to protect shareholders, directors, and officers from ordinary
liability.” Id. Indulging UMG’s theory of liability would constitute a fundamental
restructuring of longstanding rules of corporate form, allowing investors who fully
respect the corporate form to face potential liability for the actions of board
members who, in turn, act properly within the scope of their legal duties.
- 30 -
US1DOCS 7561226v2
V. UMG’S SECOND AMENDED COMPLAINT DID NOT ALLEGE

ANY FACTS UPON WHICH SECONDARY LIABILITY COULD BE
BASED.
In addition to UMG’s attempt to expand its theories of secondary (and
tertiary) liability in unprecedented ways in order to ensnare outside investor
entities, the District Court also ruled that UMG failed to adequately plead the
essential elements of each of its theories of secondary copyright liability. In a
careful analysis that parsed each element of potential secondary liability, the
District Court found that UMG was unable to plead viable claims against the
Investor Defendants for vicarious infringement, contributory infringement or
inducement to infringe.
A. The District Court Was Correct In Holding That UMG Failed To

State A Claim For Vicarious Copyright Infringement Against Any
Of The Investor Defendants.
Vicarious copyright liability may be imposed only where a party has the
right and ability to supervise the infringing conduct, and also has a direct financial
interest in the infringing activities. Napster, 239 F.3d 1004, 1023 (9th Cir. 2001)
(citation omitted); see also Grokster, 545 U.S. at 931 n.9 (“[V]icarious liability
theory … allows imposition of liability when the defendant profits directly from
the infringement and has a right and ability to supervise the direct infringer …”).
- 31 -
US1DOCS 7561226v2
1. UMG Failed To Establish That Each Investor Defendant

Had The Right And Ability To Supervise Veoh’s Alleged
Infringing Activity.
In dismissing UMG’s claims of vicarious copyright infringement against
each of the Investor Defendants, the District Court focused on UMG’s failure to
allege the second element—the alleged “direct financial interest” in Veoh’s alleged
infringement—and did not squarely reach the “right and ability to supervise”
element.8 However, this Court may affirm the District Court’s dismissal on any
grounds supported by the record even if the District Court did not consider the
issue. Fields v. Legacy Health Sys., 413 F.3d 943, 958 n.13 (9th Cir. 2005).
Courts have noted that a broad imposition of vicarious liability may have
“unduly harsh or unfair” effects, and have generally been careful to limit vicarious
liability only to defendants who “have the power to police carefully” the conduct
of infringers. Shapiro, Bernstein & Co. v. H.L. Green Co., 316 F.2d 304, 308 (2d
Cir. 1963). Thus, courts typically find the “right and ability to supervise”
requirement can be satisfied only where a defendant has a “formal, contractual
ability to control” the direct infringer’s infringing activities or has engaged in
8
UMG incorrectly states in its Opening Brief that the Investor Defendants did not
move to dismiss the SAC on the grounds that UMG failed to allege that each
Investor Defendant had a “right and ability to supervise” Veoh’s alleged
infringement. See SRE 124 (Mot. Dismiss SAC 14) (“Critically, this Court should
not approve of a theory where the statutory collective management power invested
in a company’s board of directors to manage its affairs under state law satisfies the
‘right and ability to supervise’ prong of vicarious copyright liability.”).
- 32 -
US1DOCS 7561226v2
“pervasive participation in the formation and direction” of the direct infringement.
Fonovisa v. Cherry Auction, Inc., 76 F.3d 259, 263 (9th Cir. 1996).
UMG argues that the “right and ability to supervise” element of vicarious
copyright liability can be satisfied by the mere fact that Veoh’s Board had the
statutory authority to manage Veoh’s affairs, discussed copyright issues, and could
have done more, including implementing filtering software sooner, to “identify and
reduce” Veoh’s alleged copyright infringement. See Opening Brief 35-36; RE 52-
53, 57, 66-67 (SAC ¶¶ 4, 16, 34). Even accepting the erroneous premise that these
allegations about Veoh’s Board satisfy the “right and ability to control”
requirement, it is unclear how this theory makes out a case against the separate
Investor Defendant entities. Although the District Court may not have squarely
applied its analysis to the “right and ability to supervise” element of vicarious
liability, it clearly expressed concern—and rightly so—about UMG’s attempts to
impute liability to the Investor Defendants by virtue of the thin allegations of what
board members did or did not do. RE 24-25 (Feb. 2, 2009 Order 7-8). UMG’s
argument clearly also proves too much, as it would apply in almost all
circumstances where there are boards of directors, by the mere fact that the board
existed.
UMG asserts that Fonovisa and Napster support its position on the “right
and ability to supervise” element. It is clear, however, that the facts of Fonovisa
- 33 -
US1DOCS 7561226v2
and Napster are far removed from the facts alleged in this case. In Fonovisa,
copyright owners filed suit against a swap meet operator for vicarious infringement
based on sales of counterfeit recordings by vendors at the operator’s swap meets.
76 F.3d at 260-61. In its analysis of whether the swap meet operator had a “right
and ability to supervise” the underlying infringement of others, this Court focused
on the fact that (1) the booths of the infringing swap meet vendors were located on
the physical premises that the swap meet operator “controlled and patrolled”; (2)
the swap meet operator had the right to remove vendors for any reason; and (3) the
swap meet operator “promoted the swap meet and controlled the access of
customers to the swap meet area.” Id. at 262-63. Thus, based on the swap meet
operator’s “pervasive participation” in the infringing activities of the vendors,
coupled with its contractual right to terminate the vendors, this Court found the
“right and ability to supervise” element to be satisfied. Id. at 263.
In Napster, a group of record companies alleged that Napster vicariously
infringed their copyrighted works by providing peer-to-peer file sharing software
that enabled users to exchange music files via the Internet. 239 F.3d at 1011. In
examining whether Napster had the requisite “right and ability to supervise its
users’ conduct” under Fonovisa, this Court noted that Napster had direct means to
remove infringers from its service. Id. at 1023-24. The Court also noted that the
very architecture of Napster’s system gave it the capacity to police content on its
- 34 -
US1DOCS 7561226v2
site. Id. at 1024 (citing Fonovisa, 76 F.3d at 262-63, in which this Court noted that
defendant “controlled and patrolled” the swap meet premises). This, coupled
with its right to terminate users who uploaded infringing material, was sufficient to
establish in Napster the requisite right and ability to supervise. Id.
These cases make clear that the concept of a “right and ability to supervise”
direct infringement—although subject to semantic mischief when removed from
the context of the cases that established it—requires a far closer connection to the
alleged underlying infringement than UMG can allege here. Nowhere in the SAC
does UMG allege any fact demonstrating that each Investor Defendant entity
“controlled” or directly “participated” in Veoh’s alleged infringing activity. The
best UMG can muster is that Veoh’s Board—not the Investor Defendant entities
themselves—discussed copyright issues at Board meetings. See Opening Brief, 20.
But even here, as the District Court noted, the facts UMG alleges to show that
Veoh’s Board discussed copyright issues cuts equally the other way as it
“suggest[s] that the investors were actively seeking to ensure that copyrights were
not violated.” RE 9 (May 5, 2009 Order 7). The District Court further observed
that “[i]f the Board had not considered copyright matters, UMG would likely claim
that it had been derelict in its duties.” Id. These allegations are not only benign as
to the Board members themselves, they are also of no import in trying to attach
- 35 -
US1DOCS 7561226v2
secondary liability to the separate Investor Defendant entities under Fonovisa or
Napster.
2. UMG Failed To Establish That Any Of The Investor

Defendants Have A Direct Financial Interest In The
Allegedly Infringing Activities.
In addition to a “right and ability to supervise,” liability for vicarious
infringement will lie only if the defendant also has “a direct financial interest in the
infringing activities.” Napster, 239 F.3d at 1023; see also Grokster, 545 U.S. at
931 n.9 (stating that, in addition to the “right and ability to supervise the direct
infringer,” vicarious liability “allows imposition of liability where the defendant
profits directly from the infringement”) (emphasis added). UMG alleged that the
Investor Defendants had a “direct” financial interest because they (1) contemplated
selling Veoh in the future to a third-party, and (2) operated Veoh in a manner to
increase Veoh’s user traffic and thus maximize Veoh’s future sale price. RE 70,
74 (SAC ¶¶ 40, 60).
As the District Court correctly held, none of this amounts to the type of
direct monetary payment or remuneration required by the case law. UMG was
unable to allege that the Investor Defendants themselves received any fees or
payments from any infringing conduct—i.e. had a direct financial interest in
Veoh’s alleged direct infringement. In dismissing the SAC, the District Court
explained that UMG’s allegations:
- 36 -
US1DOCS 7561226v2
[B]oil down to the contention that the Investor Defendants had

a financial interest in the allegedly infringing conduct because
they believed that users were attracted to infringing material,
and the more users the greater the sale price of the company in
the future. . . . [T]he prospect that investors might some day
earn a return on their investment from the sale of a company is
too remote to constitute a “direct” benefit from the allegedly
infringing activities of that company.
RE 16 (May 5, 2009 Order 16).
Again, the District Court’s holding was fully consistent with this Court’s
decisions in Fonovisa and Napster. In Fonovisa, in examining whether the swap
meet operator satisfied the “direct financial benefit” element, this Court noted the
“many substantive benefits” the swap meet operator received directly from the
sales of counterfeit music recordings by the swap meet vendors: “admission fees,
concession stand sales and parking fees, all of which flow directly from the
customers who want to buy the counterfeit recordings at bargain basement prices.”
76 F.3d at 263 (emphasis added). Subsequently, in Napster, 239 F. Supp. at 1023,
this Court affirmed a finding of a direct financial benefit that was based on the
lower court’s determination that revenues would flow directly to Napster from
“targeted email; advertising; commissions from links to commercial websites;
direct marketing of CDs, Napster products, and CD burners and rippers. . . .
Defendant [Napster] also may begin to charge fees for a premium or commercial
version of its software.” A&M Records, Inc. v. Napster, Inc., 114 F. Supp. 2d 896,
- 37 -
US1DOCS 7561226v2
902 (N.D. Cal. 2000), overruled on other grounds by 239 F.3d 1004 (9th Cir.
2001).
Thus, in both Fonovisa and Napster, the alleged vicarious infringer was
positioned to receive revenues directly from customers or users who engaged in the
alleged direct infringement. UMG made no allegations that the Investor
Defendants received any revenues of any type from the direct infringers; indeed,
they were only alleged to have invested in Veoh and to have hoped that the value
of their investment would someday increase. In its Opening Brief, UMG points to
no allegations to suggest otherwise. As the District Court properly concluded,
UMG’s theory of a “direct financial benefit” has no support in the case law: “the
prospect that investors might some day earn a return on their investment from the
sale of a company is too remote to constitute a ‘direct’ benefit ….” RE 16 (May 5,
2009 Order 14).
UMG attempts to shift the Court’s focus to the “customer draw” language in
Fonovisa and Napster. However, as discussed above, the Court’s analysis in those
cases makes clear that the fact that alleged underlying infringement might act as a
“draw” for customers or users is a separate question from whether the alleged
vicarious infringer receives a payment “directly” from those customers or users.
Here, while Veoh itself may or may not be subject to the “investor draw” line of
argument—a dubious proposition given Veoh’s substantial non-infringing uses—
- 38 -
US1DOCS 7561226v2
there is no basis upon which Fonovisa and Napster could be distorted to apply to
the investors in Veoh.
Furthermore, UMG cites several other cases for the generic proposition that
corporate officers, board members, and investors might be found to have a direct
financial interest in infringing activity for the mere fact they possess an ownership
interest in the infringing company. However, these cases are inapposite. None of
these courts expressly held that a passive investor or investor who merely performs
its everyday duties has a direct financial interest. Rather, the courts in these
decisions focused closely on the wrongful and culpable behavior of the secondary
infringer to determine vicarious liability. Specifically, the secondary infringers in
these decisions were found to have directly participated in and/or to have ordered
the infringing activity itself. See, e.g., RCA/Ariola Int’l, Inc. v. Thomas & Grayson
Co., 845 F.2d 773, 782 (8th Cir. 1988); Bertelsmann, 222 F.R.D. at 412-14.
UMG’s reliance on two unpublished decisions from two different district
courts is also misplaced. The District Court expressly rejected these cases for the
same reason—the named defendants were directly involved in alleged wrongful
conduct. See M. Lady, LLC v. AJI, Inc., No. 06 CIV 0194, 2007 U.S. Dist. LEXIS
69209, at *21-23 (S.D.N.Y. Sep. 19, 2007) (direct financial interest element
satisfied where individual was infringing company’s president, chairman, and CEO
and was directly paid one-half of profits made from sale of infringing product);
- 39 -
US1DOCS 7561226v2
Broadcast Music, Inc. v. Hartmarx Corp., No. 88 C 2856, 1988 U.S. Dist. LEXIS
13298, at *5-6 (N.D. Ill. Nov. 17, 1988) (finding that holding company had direct
financial interest where it: (1) owned 92% and 100% interest in its subsidiary
companies; (2) the value of holding company would increase with increased
profitability of its subsidiaries; and (3) the holding company responded to
plaintiff’s complaints of infringement on behalf of its subsidiaries). In contrast to
the cases cited by UMG and discussed above, no similar facts exist in this action
and UMG has alleged none.
Because UMG failed to sufficiently allege that the Investor Defendants had
the “right and ability to supervise” Veoh’s alleged infringement or received a
direct financial payment from Veoh’s alleged infringement, this Court should
affirm the District Court’s dismissal of UMG’s vicarious liability claim against the
Investor Defendants.
B. The District Court Correctly Held That UMG Failed To State A

Claim For Contributory Copyright Infringement Against Any Of
The Investor Defendants.
Liability for contributory infringement attaches only where the defendant:
(1) “induces, causes or materially contributes to the infringing conduct of another”;
(2) “with knowledge of the infringing activity.” Ellison v. Robertson, 357 F.3d
1072, 1076 (9th Cir. 2004) (citing Gershwin Publ’g Corp. v. Columbia Artists
Mgmt., Inc., 443 F.2d 1159, 1162 (2d Cir. 1971)).
- 40 -
US1DOCS 7561226v2

Of The Investor Defendants Materially Contributed To
Veoh’s Alleged Copyright Infringement.
A “material contribution” to direct infringement exists where a defendant
“engages in ‘personal conduct that encourages or assists the infringement.’”
Napster, 239 F.3d at 1019 (citing Matthew Bender & Co. v. West Publ’g Co., 158
F.3d 693, 706 (2d Cir. 1998)); see also Grokster, 545 U.S. at 930 (“[O]ne infringes
contributorily only by intentionally inducing or encouraging direct infringement.”)
(emphasis added). “One who directly contributes to another’s infringement should
be held accountable.” Fonovisa, 76 F.3d at 264 (emphasis added).
With its “material contribution” theory resting almost exclusively on the fact
that the Investor Defendants made an investment in Veoh, UMG shifts its focus to
a series of speculative, unconnected and anecdotal “facts” regarding (1) the Veoh
Board’s setting of company policy, and (2) the isolated public statements or other
conduct of Veoh’s individual Board members. RE 64-67, 70, 71 (SAC ¶¶ 30, 31,
34, 39, 40). UMG asserts that these facts demonstrate that the Investor Defendants
provided “strategic direction” to Veoh (through the actions and decisions of
individual Board members), in addition to funding. (Opening Br. 38-39.) As the
District Court correctly found in dismissing the FAC, however, such facts, even if
true, are insufficient to establish that any of the Investor Defendants materially
- 41 -
US1DOCS 7561226v2
contributed to Veoh’s alleged direct infringement under this Court’s precedents.
RE 22 (Feb. 2, 2009 Order 5).
UMG argues that it sufficiently alleged that each Investor Defendant made a
“material contribution” to Veoh’s alleged direct infringement because, under this
Court’s decisions in Fonovisa and Napster, their investments were used by Veoh to
provide the “site and facilities” for Veoh’s service. This is, however, yet another
example of UMG systematically removing the legal rule from its factual context in
the cases in which it was established and trying to apply it to the Investor
Defendants.
In Fonovisa, this Court held that the defendant swap meet owner materially
contributed to the direct copyright infringement of the swap meet vendors by
providing physical “support services” directly to the swap meet vendors, including
“space, utilities, parking, advertising, plumbing, and customers.” Fonovisa, 76
F.3d at 264. Similarly, in Napster, this Court affirmed the district court’s finding
that Napster materially contributed to the direct infringement of its users because it
provided concrete “support services” analogous to those provided by the swap
meet owner in Fonovisa. See 239 F.3d at 1022. Those “support services,”
identified by the district court and affirmed by this Court, included “the proprietary
software, search engine, servers, and means of establishing a connection between
users’ computers.” See A&M Records, Inc. v. Napster, Inc., 114 F. Supp. 2d 896,
- 42 -
US1DOCS 7561226v2
920 (N.D. Cal. 2000), overruled on other grounds by 239 F.3d 1004 (9th Cir.
2001). Thus, as the District Court correctly recognized, the defendants in Fonovisa
and Napster satisfied the “site and facilities” test because they “directly provided
the mechanisms and instruments by which the alleged infringement was achieved.”
RE 12 (May 5, 2009 Order 10). The District Court rightly observed that “[t]he
Invest[or] Defendants are not alleged to have done any such thing.” Id.
Accordingly, as the District Court determined, the facts alleged here against the
Investor Defendant entities fall well outside the scope of the “site and facilities”
rule established in Fonovisa and applied subsequently in Napster.
UMG accuses the District Court of engaging in “excessive formalism”
because no “practical distinction” supposedly exists between the act of funding and
the act of providing the “mechanisms and instruments” used to directly infringe.
(Opening Br. 42-43.) To the contrary, the District Court recognized a fundamental
distinction, and its ruling was entirely consistent with the requirement, set forth by
this Court in Napster, that contributory liability be based only on “personal
conduct that encourages or assists the infringement.” 239 F.3d at 1019 (emphasis
added). See also M. Nimmer & D. Nimmer, Nimmer on Copyright, §
12.04[A][3][a] (2007) (“[I]n order to be deemed a contributory infringer, the
authorization or assistance must bear some direct relationship to the infringing
- 43 -
US1DOCS 7561226v2
acts ….”) (emphasis added). No such conduct was alleged against the Investor
Defendants here.
Recognizing that UMG’s theory of contributory infringement is based
principally on the fact that the Investor Defendants each provided funding to Veoh
that Veoh then used to operate its business, the District Court properly cited this
Court’s decision in Perfect 10, Inc. v. Visa Int’l Serv. Ass’n, 494 F.3d at 800, in
which this Court affirmed the district court’s dismissal of contributory copyright
infringement claims against credit card companies that provide payment processing
services to alleged direct infringers. In Perfect 10, this Court found such a theory
of contributory liability too attenuated, and noted that “[a]ny conception of ‘site
and facilities’ that encompasses [such companies] would also include a number of
peripherally-involved third parties, such as consumer display companies, storage
device companies, and software companies that make the software necessary to
alter and view the pictures and even utility companies that provide electricity to the
Internet.” Id. UMG argues that the Investor Defendants are not “peripherally-
involved third parties” like the ones listed by this Court in Perfect 10. UMG’s
argument, however, avoids the point. The District Court did not find that the
Investor Defendants were on equal footing with, for example, a utility company.
Rather, the District Court rejected the very logic of UMG’s underlying theory,
under which any “contribution” that allows an alleged direct infringer to stay in
- 44 -
US1DOCS 7561226v2
business might fall within the expansive scope of the “material contribution”
concept espoused by UMG. See RE 12 (May 5, 2009 Order 10). The Court’s
rejection of UMG’s theory was entirely consistent with this Court’s holding in
Perfect 10.
UMG also relies on UMG Recordings, Inc. v. Bertelsmann AG, in which the
plaintiffs’ allegations against certain investors in Napster, based on facts very
different from those alleged here, were held to be sufficient to state a claim for
contributory infringement. See 222 F.R.D. 408 (N.D. Cal. 2004). As discussed
above in Section V(A), the complaints at issue in Bertelsmann contained specific
facts alleging that the two Napster investors exercised full, direct and immediate
control over Napster’s operations, and indeed ordered that the unlawful Napster
service continue operating in an wrongful manner even after it had been adjudged
to infringe and a preliminary injunction entered against it. Id. at 412-13. The court
in Bertelsmann specifically noted that the complaints contained sufficient facts to
allege that each investor had direct control over Napster’s infringement. Id. at 413.
Here, as the District Court rightly found, UMG has not alleged that any Investor
Defendant had control over Veoh’s operations, much less that any Investor
Defendant had the power to individually “order” Veoh to engage in copyright
infringement. RE 12-13 (May 5, 2009 Order 10-11).
- 45 -
US1DOCS 7561226v2
UMG’s reliance on this Court’s decision in Perfect 10, Inc. v. Amazon.com,
Inc., 487 F.3d 701 (9th Cir. 2007), is similarly misplaced. In Amazon, this Court
addressed, among other things, whether Google could be liable for contributory
infringement of Perfect 10’s copyrighted photographs, which were published
online by third parties and accessible to users of Google’s search engine. 408 F.3d
at 710. This Court found that Google could be held contributorily liable “if it had
knowledge that infringing Perfect 10 images were available using its search
engine, could take simple measures to prevent further damage to Perfect 10’s
copyrighted works, and failed to take such steps.” Id. at 729 (emphasis added).
But in reaching this finding, this Court made clear that the rule for contributory
infringement it applied to Google’s search engine was specific to “provider[s] of
Internet access or services.” Id. at 728 (“We have further refined the test [for
contributory infringement established in Ellison, Napster, and Fonovisa] in the
context of cyberspace to define when contributory liability can be imposed on a
provider of Internet access or services.”) (emphasis added). UMG
mischaracterizes this Court’s holding in Amazon by removing it from the context
that limited it to internet service providers (which in this case would be, at best,
Veoh) and applying it to the Investor Defendants, which cannot be alleged to be in
a similar position to an internet service provider like Google.
- 46 -
US1DOCS 7561226v2

Of The Investor Defendants Had Actual Knowledge Of
Veoh’s Alleged Infringing Activity.
UMG incorrectly states in its Opening Brief that the District Court
“accepted” its allegation that the Investor Defendants had sufficient knowledge of
Veoh’s alleged infringement to establish a claim of contributory infringement.
Rather, in dismissing UMG’s claims of contributory copyright infringement
against each of the Investor Defendants, the District Court focused on UMG’s
failure to allege the second element—the “material contribution” to Veoh’s alleged
infringement—and explicitly stated that it did not “reach the question of whether
[the] SAC sufficiently alleges that the Investor Defendants had actual knowledge
of direct infringement.” RE 11 (May 5, 2009 Order 9).
As discussed above, UMG concedes, as it must, that Veoh’s service had
substantial lawful, non-infringing uses in addition to its alleged infringements.
Where an accused device or service is capable of such “substantial non-infringing
uses,” a plaintiff must allege actual knowledge of specific acts of infringement to
state a claim for contributory infringement. Napster, 239 F.3d at 1020-21. All of
UMG’s factual allegations regarding the Investor Defendants’ “knowledge” merely
amount to, at best, conclusory generalizations about individual Board members.
UMG cites no authority for its theory that investing shareholders, by their status as
investors, can have imputed to them whatever specific knowledge of copyright
- 47 -
US1DOCS 7561226v2
infringement may reside in the underlying company’s management or its board
members.
UMG failed to sufficiently allege that the Investor Defendants possessed the
requisite level of actual knowledge of Veoh’s alleged infringement, or that the
Investor Defendants directly and materially contributed to Veoh’s alleged
infringement. Accordingly, this Court should affirm the District Court’s dismissal
of UMG’s vicarious liability claim against the Investor Defendants.
C. The District Court Was Correct in Dismissing UMG’s Claim for

Inducement To Infringe Copyright.
In Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., the Supreme Court
held that liability for inducement to infringe copyright may be found only where a
defendant “[1] distributes a device [2] with the object of promoting its use to
infringe copyright ….” 545 U.S. 913, 936-37 (2005). As the District Court rightly
found in dismissing UMG’s inducement claims against the Investor Defendants,
one cannot plausibly construe any of the allegations in the SAC to satisfy
Grokster’s “distribution” element. RE 16 (May 5, 2009 Order 14).
1. The District Court Correctly Found That Liability For

Inducement To Infringe Under Grokster Requires The
Distribution Of A Device Or Product.
To be found liable for inducement of copyright infringement under Grokster,
a defendant must actually distribute a device or product. See Grokster, 545 U.S. at
918-19 (stating, in the first sentence of the decision, that “[t]he question is under
- 48 -
US1DOCS 7561226v2
what circumstances the distributor of a product capable of both lawful and
unlawful use is liable for acts of infringement by third parties using the product.”)
(emphasis added). UMG does not cite a single post-Grokster case in which a
defendant who was not alleged to have actually distributed a potentially infringing
device or product was found liable for inducement of copyright infringement under
the Grokster standard.
UMG erroneously argues that because the Grokster Court included in a
string cite (on an unrelated point) a case that did not discuss the distribution
requirement, distribution is no longer a required element of inducement. See
Opening Br. 54; Grokster, 545 U.S. at 936 (citing Water Technologies Corp. v.
Calco Ltd., 850 F.2d 660 (Fed. Cir. 1988)). As the District Court recognized,
however, UMG’s reliance on Water Technologies is misplaced. See RE 16 (May
5, 2009 Order 14). First, the Grokster Court cited that case solely as support for
another issue—i.e. its discussion of “active steps . . . taken to encourage direct
infringement.” Grokster, 545 U.S. at 936. The Court did not mention the
distribution element in connection with its reference to Water Technologies, and
nothing in the Grokster opinion suggests that the Court even considered Water
Technologies relevant to the device distribution issue.
Second, in Water Technologies, the Federal Circuit found the defendant
liable for inducing a company to commit patent infringement based on the fact that
- 49 -
US1DOCS 7561226v2
the defendant knew about the asserted patents, gave the company the infringing
formulas identified in the patents, helped make the infringing product, prepared
consumer use instructions, and controlled the manufacture of the infringing
product by designing it to his specification. See 850 F.2d at 668. Even if Water
Technologies applied here—and it does not—UMG has alleged no analogous facts.
Bottom line, UMG has not alleged—and cannot allege—that the Investor
Defendants “distributed” anything, let alone an infringing device, as Grokster
requires.9 Here again, UMG’s theory that the Investor Defendants could be guilty
of inducement by providing funding to Veoh proves too much, as it could attach
liability to any entity who invested in an alleged infringer.10
9
Although UMG is correct that the Supreme Court in Grokster characterized
inducement as a species of contributory liability, this does not support UMG’s
argument that Grokster’s inducement rule can apply to defendants that do not
distribute a product. Rather, the Court in Grokster held that distributors of
potentially infringing devices can be liable for inducement where there is evidence
that the distributors encouraged others to use the devices to infringe. Grokster, 545
U.S. at 934.
10
UMG argues in the alternative that even under the District Court’s reading of
Grokster (i.e., that inducement under Grokster requires distribution of a device or
product), it still pled sufficient facts to satisfy the “distribution” element. UMG
contends that it alleged that the Investor Defendants “distributed” and “made
available technology and devices with the object and intent of promoting their use
to infringe copyright materials,” and that the Investor Defendants, aware of
infringing content on Veoh, had operational and decision-making control over
Veoh. (Opening Br. 55-56.) None of this changes the fact that UMG’s theory is
principally grounded in the funding provided to Veoh and the board designations
made by the Investor Defendants. Moreover, such “labels,” “conclusions,” and
“formulaic recitation[s] of the elements of a cause of action” are insufficient
factually to state a viable claim for inducement under Bell Atl. Corp. v. Twombly,
550 U.S. 544, 555 (2007); see also Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009).
- 50 -
US1DOCS 7561226v2
2. UMG Failed To Establish That The Investor Defendants

Induced Veoh To Infringe Copyright.
Cognizant of its inability to plead any facts suggesting that the Investor
Defendants actually “distribute” Veoh’s allegedly infringing service, UMG instead
argues that the facts it alleges purportedly supporting the “wrongful objective”
requirement of the Grokster standard are sufficient to state a claim for inducement
under Grokster, without more. UMG’s argument fails for two reasons. First, even
accepting such facts as true (and they are not) and construing them in the light
most favorable to UMG, the most these facts can do is satisfy the intent element
for inducement under Grokster. As discussed above, while such facts may be the
minimum necessary to state a claim of inducement, they are not, by themselves,
sufficient to state such a claim under Grokster. To state a claim for inducement
under Grokster, a defendant’s wrongful intent, no matter how well-pleaded, must
still be accompanied by the requisite act of distributing a device or product. See
Grokster, 545 U.S. at 936-37.
Second, even assuming that UMG’s expansive formulation of the Grokster
standard is correct and the actual distribution of a product is not a prerequisite for
liability for inducement, the anecdotal “facts” UMG alleges still would not in any
event satisfy the intent element of Grokster, which requires the Investor
Defendants to have engaged in “clear expression or other affirmative steps … to
- 51 -
US1DOCS 7561226v2
foster infringement.” 11 Id. at 919 (emphasis added). In support of its inducement
claim, the only facts UMG alleges are that: (1) employees of one Investor
Defendant commented on “pirated content” being available on Veoh.com; (2) the
effect of filtering technology was discussed at a Veoh Board of Directors’ meeting;
(3) Veoh’s competitors implemented filtering technology before Veoh did; and (4)
the Board approved Veoh’s VeohTV software. (See Opening Br. 52-53.) These
allegations cannot satisfy the Grokster standard, which requires a showing of
“purposeful, culpable expression and conduct,” that is directed to “foster[ing]
infringement. 545 U.S. at 919, 937; see also Perfect 10, Inc. v. Amazon, Inc., 487
F.3d at 701, n.11 (“Google’s activities do not meet the ‘inducement’ test explained
in Grokster because Google has not promoted the use of its search engine
specifically to infringe copyrights.”) (emphasis added). UMG cannot construe any
of its allegations as demonstrating that each of Investor Defendants themselves
took affirmative steps to promote or foster infringement by either Veoh or its
customers.
11
UMG points to the fact that in dismissing the FAC, the District Court focused on
UMG’s failure to allege that any of the Investor Defendants encouraged copyright
infringement by Veoh, and in dismissing the SAC shifted its focus to UMG’s
failure to allege that any of the Investor Defendants “distributed” a device or
product. This in no way suggests, as UMG contends, that the District Court
“implicitly acknowledged that UMG had adequately alleged such encouragement”
in the SAC.
- 52 -
US1DOCS 7561226v2
Accordingly, this Court should affirm the District Court’s dismissal of
UMG’s claims of inducement to infringe copyright against the Investor
Defendants.
VI. CONCLUSION
The District Court was correct in dismissing the SAC with prejudice.
Having been given two opportunities to plead and ample time for discovery, UMG
was incapable of meeting its pleading burden under Twombly and Iqbal. UMG
repeatedly espoused unprecedented theories of secondary liability that would
purport to create copyright liability in third party investors for the mere act of
investing coupled with the ability to designate individuals to serve on the board.
As the District Court found, UMG’s theories of liability would have been
inconsistent with established principles of corporate governance and would have
imposed liability on third parties who had otherwise engaged in no wrongful act.
The District Court was additionally correct in finding that UMG also, and
independently, failed to plead critical elements of each of its secondary liability
theories, often substituting semantic distortions of this Court’s precedent to create
- 53 -
US1DOCS 7561226v2
secondary liability where it has never previously been found to exist. This Court
should, accordingly, affirm the decision of the District Court in its entirety.
Dated: June 3, 2010 Respectfully submitted.
/s/ Robert G. Badal
Robert G. Badal
Joel Cavanaugh
Emily S. Churg
WILMER CUTLER PICKERING
HALE AND DORR LLP
350 South Grand Avenue, Suite 2100
Los Angeles, CA 90071
(213) 443-5300

APPELLEES SHELTER CAPITAL
PARTNERS, LLC AND SHELTER
VENTURE FUND, L.P.
Glen Kulik
Alisa S. Edelson
KULIK, GOTTESMAN, MOUTON &
SIEGEL, LLP
15303 Ventura Boulevard, Suite 1400
Sherman Oaks, CA 91403
(310) 557-9200

APPELLEES SPARK CAPITAL,
LLC, SPARK CAPITAL, L.P., AND
THE TORNANTE COMPANY LLC
- 54 -
US1DOCS 7561226v2
CERTIFICATE OF COMPLIANCE
This brief complies with the type-volume limitation of Fed. R. App. P.
37(a)(7)(B) because it contains 12,287 words, excluding the parts of the brief
exempted by Fed. R. App. 32(a)(7)(B)(iii).
This brief complies with the typeface requirements of Fed. R. App. P.
32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6) because it has
been prepared in a proportionally spaced typeface using Microsoft Word 2003 in
14-point font size and Times New Roman font style.
Dated: April 20, 2010 By: /s/ Emily S. Churg

Emily S. Churg
- 55 -
US1DOCS 7561226v2
STATEMENT OF RELATED CASES
Pursuant to Circuit Rule 28-2.6, the Investor Defendants identify UMG
Recordings, Inc. v. Veoh Networks, Inc., Case No. 09-56777, as a related case
pending in this Court. That case “arise[s] out of the same or consolidated cases in
the district court.” See Circuit Rule 28-2.6(a).
- 56 -
US1DOCS 7561226v2
CERTIFICATE OF SERVICE
I hereby certify that I electronically filed the foregoing with the Clerk of the
Court for the United States Court of Appeals for the Ninth Circuit by using the
appellate CM/ECF system on June 3, 2010.
Participants in the case who are registered CM/ECF users will be served by
the appellate CM/ECF system.
I further certify that some of the participants in the case are not registered
CM/ECF users. I have mailed the foregoing document by First-Class Mail,
postage prepaid, or have dispatched it to a third party commercial carrier for
delivery within three calendar days, to the following non-CM/ECF participants:
Counsel for Defendant Veoh Networks, Inc.:
WINSTON & STRAWN LLP

Michael S. Elkin
Thomas P. Lane
200 Park Avenue
New York, New York 10166-0007
Telephone: (212) 294-6700
Facsimile: (212) 294-4700
I also certify that on June 3, 2010, pursuant to Federal Rules of Appellate
Procedure 25(a)(2)(B) and 30-1.7, I: (a) mailed four paper copies of Defendants-
Appellees Shelter Capital Partners, LLC, Shelter Venture Fund, L.P., Spark
Capital, LLC, Spark Capital, L.P., and The Tornante Company LLC’s
Supplemental Excerpts of Record to the Court via First-Class Mail, postage
- 57 -
US1DOCS 7561226v2
prepaid; and (b) mailed one paper copy of the Supplemental Excerpts of Record to
the following counsel of record, via First-Class Mail, postage prepaid:
For Plaintiffs-Appellants UMG Recordings, Inc., et al
IRELL & MANELLA, LLP

Steve Marenberg
Brian Ledahl
Carter Batsell
1800 Avenue of the Stars
Suite 900
Los Angeles, California 90067
Telephone: (310) 277-1010
Facsimile: (310) 203-7199
For Defendant Veoh Networks, Inc.
WINSTON & STRAWN LLP

Michael S. Elkin
Thomas P. Lane
200 Park Avenue
New York, New York 10166-0007
Telephone: (212) 294-6700
Facsimile: (212) 294-4700
By: /s/ Emily S. Churg

Emily S. Churg
- 58 -
US1DOCS 7561226v2

Shelter Capital

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Shelter Capital

Uploaded by

Copyright:

Available Formats

Case: 09-55902 06/03/2010 Page: 1 of 65 ID: 7359483 DktEntry: 26

IN THE UNITED STATES COURT OF APPEALS

UMG RECORDINGS, INC., et al.,

SHELTER CAPITAL PARTNERS, LLC, et al.,

On Appeal from the United States District Court

CONSOLIDATED ANSWERING BRIEF OF DEFENDANTS-APPELLEES

Robert G. Badal Glen Kulik

CORPORATE DISCLOSURE STATEMENT

Pursuant to Rule 26.1 of the Federal Rules of Appellate Procedure,

Defendants-Appellees Shelter Capital Partners LLC, Shelter Venture Fund, L.P.,

COUNTER STATEMENT OF ISSUE PRESENTED ............................................ 1

STATEMENT OF FACTS ..................................................................................... 2

I. PROCEDURAL BACKGROUND ............................................................... 2

II. UMG’S ALLEGATIONS AND THE DISTRICT COURT’S

A. UMG’s Allegations And The District Court’s Dismissal Of The

B. UMG’s Allegations And The District Court’s Dismissal Of The

SUMMARY OF ARGUMENT ............................................................................ 12

III. STANDARD OF REVIEW ........................................................................ 19

IV. THE DISTRICT COURT RIGHTLY DISMISSED THE SAC, WHICH

A. Under UMG’s Theories Of Secondary Copyright Infringement,

B. The District Court Correctly Held That UMG’s Theories Of

V. UMG’S SECOND AMENDED COMPLAINT DID NOT ALLEGE

A. The District Court Was Correct In Holding That UMG Failed To

1. UMG Failed To Establish That Each Investor Defendant

2. UMG Failed To Establish That Any Of The Investor

B. The District Court Correctly Held That UMG Failed To State A

1. UMG Failed To State Facts Sufficient To Allege That Any

2. UMG Failed To State Facts Sufficient To Allege That Any

C. The District Court Was Correct in Dismissing UMG’s Claim for

1. The District Court Correctly Found That Liability For

2. UMG Failed To Establish That The Investor Defendants

VI. CONCLUSION .......................................................................................... 53

CERTIFICATE OF COMPLIANCE .................................................................... 55

STATEMENT OF RELATED CASES ................................................................ 56

A&M Records, Inc. v. Napster, Inc.,

A&M Records, Inc. v. Napster, Inc.

Arc Ecology v. U.S. Dep't of Air Force,

Balistreri v. Pacifica Police Dep't,

Bell Atl. Corp. v. Twombly,

Broadcast Music, Inc. v. Hartmarx Corp.,

City of Arcadia v. U.S. Envtl. Prot. Agency,

Columbia Pictures Indus., Inc. v. Redd Horne, Inc.,

Fields v. Legacy Health Sys.,

Fonovisa v. Cherry Auction, Inc.,

In re First Alliance Mortgage Co.,

M. Lady, LLC v. AJI, Inc.,

Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd.,

Neilson v. Union Bank of California,

Orthokinetics, Inc. v. Safety Travel Chairs, Inc.,

Perfect 10, Inc. v. Amazon.com, Inc.,

Perfect 10, Inc. v. Visa Int'l Serv. Ass'n,

RCA/Ariola Int'l, Inc. v. Thomas & Grayson Co.,

Shapiro, Bernstein & Co. v. H.L. Green Co.,

Stanford Univ. Hosp. v. Fed. Ins. Co.,

Transgo, Inc. v. Ajac Transmission Parts Corp.,

U.S. v. Best Foods,

UMG Recordings et al. v. Veoh Networks, Inc.,

UMG Recordings, Inc. v. Bertelsmann AG,

Federal Rule of Civil Procedure 12(b)(6)............................................................1, 3

3 Melville B. Nimmer & David Nimmer, Nimmer on Copyright

COUNTER STATEMENT OF ISSUE PRESENTED

1. Whether the District Court correctly dismissed with prejudice

pursuant to Federal Rule of Civil Procedure 12(b)(6) Plaintiffs-Appellants’ claims

against Defendants-Appellees for vicarious copyright infringement, contributory