Professional Documents
Culture Documents
No. 09-55902
Plaintiffs-Appellants
v.
Defendants-Appellees.
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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.
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TABLE OF CONTENTS
Page
ARGUMENT ....................................................................................................... 19
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TABLE OF AUTHORITIES
Federal Cases
Ashcroft v. Iqbal,
129 S. Ct. 1937 (2009) .......................................................................... 19, 20, 50
Ellison v. Robertson,
357 F.3d 1072 (9th Cir. 2004) ..................................................................... 17, 40
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Knievel v. ESPN,
393 F.3d 1068 (9th Cir. 2005) ...........................................................................19
Metge v. Baehler,
762 F.2d 621 (8th Cir. 1985) .............................................................................29
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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
Other
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and (3) those Board members individually engaged in conduct consistent with their
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STATEMENT OF FACTS
I. PROCEDURAL BACKGROUND
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
UMG also alleged in its initial complaint that certain companies, including
Shelter Capital LLC, Spark Capital LLC, and The Tornante Company, LLC (the
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).
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facilitation of, the infringing conduct taking place on Veoh is known.” RE 122;
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
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
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
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
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Motion to Dismiss the FAC. Although the court granted the motion “without
Complaint. RE 27.
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,
Recognizing that the SAC was functionally indistinguishable from the FAC,
and thus equally defective, the District Court dismissed the claims against the
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”
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.
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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
increase in value. See RE 104, 111-112 (FAC ¶¶ 16, 30, 31, 32). UMG further
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
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
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appropriate licenses, and [knew] full well that Veoh’s users used Veoh to engage
website contain copyrighted material”; and (3) “have and continue to knowingly
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
inherently entails making almost all these ‘decisions,’” and that the FAC’s
“descriptions of how the Investor Defendants exercised control are the equivalent
Second, the District Court found that UMG’s allegations referenced the
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themselves, and failed to sufficiently allege the Investor Defendants’ control over
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
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
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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
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
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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
(notes from a Board meeting reflect that “[o]ther video sharing sites have a 10-15%
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
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
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Summarizing the new allegations UMG added to the SAC, the District Court
concluded:
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
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
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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
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
allege facts sufficient to make out claims for secondary liability, the District Court
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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
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
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
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
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
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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
Court ruled, such allegations, if permitted to survive, would “expand the scope of
UMG has never cogently explained how its various allegations against Veoh or its
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
Defendants still failed. As determined by the District Court, and as the Investor
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copyright liability UMG alleged, UMG failed to adduce facts that would support
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
remuneration paid directly to the secondary infringer, all UMG could muster was a
interest” in Veoh. RE 57 (SAC ¶ 16). As the District Court found, this claim was
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
meant that the designating venture investor automatically had the right and ability
“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
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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
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
“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
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
argument that the Investor Defendants’ mere funding of Veoh should be considered
the District Court was correct that UMG’s assertion would be inconsistent with
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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
impose liability upon any third party who supported the alleged infringer’s ability
device. UMG could allege neither here. As the District Court found, UMG could
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
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
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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
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
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,
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.
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Accepting UMG’s novel theories of secondary liability would run directly counter
greater obstacles to investment in the internet space. This Court should not accept
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ARGUMENT
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.” 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,
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
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
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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
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
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
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lawful activity but also is alleged to have engaged in specific acts of copyright
various aspects of Veoh’s business. No court has imposed liability under any
for good reason, in that imposing liability under such circumstances would
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).
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Defendants that amount to “acute fault” on their part. Providing funding and
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
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
court’s holding—that the facts alleged in that case against two investors in Napster
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.
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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
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
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
would not have attached to the investors in the absence of such direct and culpable
underlying acts of direct infringement. UMG has not, and cannot, allege such acts
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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:
if adopted, would give rise to a similar “anomalous result” under the DMCA by
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
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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
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.
anything contemplated in the case law, UMG also advanced arguments in the court
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
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
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allegations that the Investor Defendants provided venture funding to Veoh, UMG’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
secondary copyright liability. Not only is UMG’s theory of liability expansive and
what individual Board members said or did demonstrate no wrongdoing on the part
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
allegations, the District Court rightly determined that the allegations of collective
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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
more than “titillating” details about the “inner workings of Veoh and its Board of
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
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
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.
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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
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
Ajac Transmission Parts Corp., 768 F.2d 1001, 1021 (9th Cir. 1985) (holding
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.
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.
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1986) (holding that “corporate officers who actively aid and abet their
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
Similarly, the cases UMG cites regarding bank liability (Opening Brief 58-
60) are also inapposite because they involve situations where the banks themselves
allege—nor could it7—that Veoh was itself an inherently unlawful business and,
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
and prolonged the business life of the corporation for its own benefit at the expense
7
See Footnote 4, supra.
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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
was seeking in this case, the District Court appropriately concluded that it was “not
RE 17 (May 5, 2009 Order 15). The District Court further found that “[a]lthough
invite a wholesale weakening of the no less important principle that the corporate
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.
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entities, the District Court also ruled that UMG failed to adequately plead the
careful analysis that parsed each element of potential secondary liability, the
District Court found that UMG was unable to plead viable claims against the
inducement to infringe.
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 …”).
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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”
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.”).
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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
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
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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
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
coupled with its contractual right to terminate the vendors, this Court found the
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
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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
These cases make clear that the concept of a “right and ability to supervise”
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
best UMG can muster is that Veoh’s Board—not the Investor Defendant entities
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
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Napster.
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
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,
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
Veoh’s alleged direct infringement. In dismissing the SAC, the District Court
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Again, the District Court’s holding was fully consistent with this Court’s
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.”
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
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,
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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
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
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
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
Here, while Veoh itself may or may not be subject to the “investor draw” line of
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there is no basis upon which Fonovisa and Napster could be distorted to apply to
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
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.
courts is also misplaced. The District Court expressly rejected these cases for the
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);
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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
the cases cited by UMG and discussed above, no similar facts exist in this action
Because UMG failed to sufficiently allege that the Investor Defendants had
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.
(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
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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
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
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
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UMG argues that it sufficiently alleged that each Investor Defendant made a
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
providing physical “support services” directly to the swap meet vendors, including
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
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
users’ computers.” See A&M Records, Inc. v. Napster, Inc., 114 F. Supp. 2d 896,
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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”
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
conduct that encourages or assists the infringement.” 239 F.3d at 1019 (emphasis
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acts ….”) (emphasis added). No such conduct was alleged against the Investor
Defendants here.
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
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
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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
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
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
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
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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
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
Internet access or services.” Id. at 728 (“We have further refined the test [for
that limited it to internet service providers (which in this case would be, at best,
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UMG incorrectly states in its Opening Brief that the District Court
“accepted” its allegation that the Investor Defendants had sufficient knowledge of
against each of the Investor Defendants, the District Court focused on UMG’s
infringement—and explicitly stated that it did not “reach the question of whether
[the] SAC sufficiently alleges that the Investor Defendants had actual knowledge
state a claim for contributory infringement. Napster, 239 F.3d at 1020-21. All of
UMG cites no authority for its theory that investing shareholders, by their status as
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members.
UMG failed to sufficiently allege that the Investor Defendants possessed the
infringement. Accordingly, this Court should affirm the District Court’s dismissal
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
one cannot plausibly construe any of the allegations in the SAC to satisfy
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
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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
string cite (on an unrelated point) a case that did not discuss the distribution
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,
5, 2009 Order 14). First, the Grokster Court cited that case solely as support for
infringement.” Grokster, 545 U.S. at 936. The Court did not mention the
nothing in the Grokster opinion suggests that the Court even considered Water
liable for inducing a company to commit patent infringement based on the fact that
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the defendant knew about the asserted patents, gave the company the infringing
formulas identified in the patents, helped make the infringing product, prepared
product by designing it to his specification. See 850 F.2d at 668. Even if Water
Bottom line, UMG has not alleged—and cannot allege—that the Investor
requires.9 Here again, UMG’s theory that the Investor Defendants could be guilty
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).
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Cognizant of its inability to plead any facts suggesting that the Investor
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
sufficient to state such a claim under Grokster. To state a claim for inducement
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
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claim, the only facts UMG alleges are that: (1) employees of one Investor
(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
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
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.
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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
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
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
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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.
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
Glen Kulik
Alisa S. Edelson
KULIK, GOTTESMAN, MOUTON &
SIEGEL, LLP
15303 Ventura Boulevard, Suite 1400
Sherman Oaks, CA 91403
(310) 557-9200
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CERTIFICATE OF COMPLIANCE
37(a)(7)(B) because it contains 12,287 words, excluding the parts of the brief
32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6) because it has
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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
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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
Participants in the case who are registered CM/ECF users will be served by
I further certify that some of the participants in the case are not registered
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
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prepaid; and (b) mailed one paper copy of the Supplemental Excerpts of Record to
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