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Disney Enterprises, Inc., et al. v. Hotfile Corp., et al.

District court dismisses plaintiff motion picture companies’ claim for direct copyright infringement against defendant file-sharing site and its operator on defendants’ motion to dismiss, but allows plaintiffs’ claim for secondary infringement to stand against both corporate and individual defendants.

Plaintiffs, motion picture companies, filed suit against defendants, Hotfile Corp. and Anton Titov, the owner and operator of the file-sharing website, alleging both direct and secondary infringement of copyrighted movies owned by plaintiffs. On defendants’ motion to dismiss, the district court dismissed without prejudice plaintiffs’ claim for direct infringement, finding the allegations that the website allows users to upload and download copyrighted material without direct or volitional conduct by defendants – although defendants did nothing to stop and even encouraged the massive infringement – were insufficient to state a claim against defendants for direct infringement. The court allowed plaintiffs’ claim for secondary infringement, however. Plaintiffs had sufficiently pleaded allegations in support of their claim that defendants induced infringement of, committed contributory infringement of, and vicariously infringed upon the plaintiffs' copyrighted works. The court also found plaintiffs’ allegations that individual defendant Titov manages Hotfile, adopted the business model leading to the massive infringement, personally refuses to implement technologies that could reduce the infringement, and that he has paid users to upload files, sufficient to state a claim against him for secondary infringement.

According to the complaint, the website allows peer-to-peer sharing of electronic files by allowing users to upload files to Hotfile’s servers, receive links to those files and share those links with others, who can use the links to download the files. Defendants make a profit from the site in two ways. While anyone can use a Hotfile-generated link to download a file, users can pay to be members of the site and download more files and at much faster speeds than nonmembers. Hotfile also sells "hotlinks," links that third-party sites can post that, when clicked, automatically begins the download of the file, without ever directing the person who clicked the link to

To increase the number of members, Hotfile runs an “affiliate program” that pays users to upload the most popular content to its servers and asks that the users promote their links. Hotfile pays cash to users who upload files when the file is downloaded 1000 times, and the payment scheme rewards those who upload highly popular and large files more than those who upload highly popular but not-so-large files. If a nonmember clicks a link and joins as a member, Hotfile gives the person who uploaded the file a "credit." Third-party sites that post links directing users to Hotfile-hosted content also receive payment when a user who clicked on a link on the third-party site then becomes a Hotfile member. Defendant Titov designed Hotfile’s business model and allegedly personally paid some of Hotfile's uploading users.

As plaintiffs alleged in their complaint, popular links generated big profits for Hotfile and the most popular links on the site are those that contain copyrighted materials and, as a result of their popularity, copyright-infringing files constitute the bulk of files downloaded through the site. Hotfile's business model encourages users to upload material with copyright protection, including the plaintiffs' films. Hotfile could easily correct the rampant infringement; it has the means to control the infringement, such as keyword filtering and audio fingerprinting.

Defendants argued – and the court agreed – that plaintiffs’ complaint failed to state a cause of action for either direct copyright infringement. Citing Religious Technology Center v. Netcom On-Line Communication Services, 907 F. Supp. 1361 (N.D. Cal. 1995), and cases that followed it, the court noted that that the standard in cases alleging that an internet company is infringing a plaintiff's copyright requires allegations beyond merely that the defendant gave users access to copyrighted material posted by others. Direct liability for copyright infringement requires more than mere ownership of the machine or system used by others to make illegal copies. Defendants must engage in some volitional act sufficiently close and causal to the illegal copying to conclude that they trespassed on the exclusive rights of the copyright owner. The court concluded that the complaint lacked the necessary allegations of volitional conduct by defendants. Plaintiffs alleged that the website allowed users to upload and download copyrighted material, but failed to state any volitional conduct from either defendant. While defendants allegedly encouraged the massive infringement, nothing in the complaint alleged that either defendant took direct, volitional steps to violate the plaintiffs' copyright – for example, by uploading copyrighted material.

The court rejected plaintiffs’ argument that, Netcom notwithstanding, they had plead a claim for direct copyright infringement by alleging that defendants created a business plan that induced infringement. Many of the cases plaintiffs cited involved volitional acts by defendants. In others the courts explicitly recognized that their holdings did not apply in the case where a website merely uploads or downloads copyrighted material at the direction of a user.

The court specifically dismissed as incorrectly decided Capitol Records, Inc. v. Mp3Tunes, LLC, 2009 WL 3364036 (S.D.N.Y. Oct. 16, 2009), and Arista Records LLC v., Inc., 633 F. Supp. 2d 124 (S.D.N.Y. 2009), two cases from the Southern District of New York upon which plaintiff relied. Arista Records, in which the court held that a policy encouraging infringement coupled with an ability – but refusal – to stop the massive infringement amounted to a volitional act, ignored the reasoning of Netcom and other cases following it that knowledge together with inducement, or supervision along with financial interest in the illegal copying, gives rise to secondary – not direct – liability for infringement. Capitol Records, in which the court held that a company's knowledge of massive infringement plausibly alleged volitional conduct, had no real analysis and simply cited cases as authority for its holding that the court in Disney had already determined failed to support the conclusion or, in the case of Arista Records, was wrongly decided.

The court also rejected plaintiffs’ argument that Netcom and the other cases following it applied only to cases concerning the right to reproduce copyrighted material, not the right to distribute it, as in plaintiffs’ suit. Netcom is not so limited – the court in that case considered the copyright holder's right to distribution in its analysis – and other courts have similarly applied Netcom where a defendant allegedly violated a copyright holder's right to distribute the material. The plaintiffs also contended that they alleged a volitional act in that makes additional copies once the copyrighted material is uploaded to the server, but the court disagreed, noting that courts have repeatedly held that the automatic conduct of software, unaided by human intervention, is not volitional.

While the court dismissed as insufficiently plead plaintiffs’ claim for direct infringement, it let stand their claim for secondary infringement, finding that plaintiffs had properly plead that defendants had induced infringement of, had committed contributory infringement of, and had vicariously infringed plaintiffs' copyrighted works.

Citing Supreme Court precedent in MGM Studios v. Grokster Ltd, 545 U.S. 912 (2005), the court noted that defendants may be liable for inducing infringement if they distribute a device with the object of promoting its use for copyright infringement, shown by clear expression or affirmative steps to foster infringement. Plaintiffs alleged defendants use the website to promote copyright infringement and that defendants fostered this infringement by creating a structured business model that encouraged users to commit copyright infringement, as outlined in detail in the complaint, and therefore properly plead a claim for inducement.

The complaint properly plead a claim for contributory infringement – where a defendant, with knowledge of the infringing acts of others, induces, causes, or materially contributes to the infringing conduct. The complaint alleged that, through their business model, defendants induced users to infringe the plaintiffs' copyright, that caused and contributed to this infringement, and that defendants knew of the massive infringement.

To allege a claim for vicarious infringement, plaintiff must allege that defendant profits from direct infringement while declining to exercise a right to stop or limit it. Plaintiffs’ complaint sufficiently plead vicarious infringement in that it alleged that defendants have complete control over the servers that users employ to infringe, have the necessary technology to stop the infringement and refuse to stop the massive infringement, instead actually encouraging the infringement because it increases their profits. The court also noted that the complaint alleged specific “technological gizmos” and software that defendants could use to prevent the infringement.

Finally, the court rejected defendants’ argument that plaintiffs had failed to plead sufficient allegations to maintain a claim against individual defendant Anton Titov. Plaintiffs alleged that Titov manages Hotfile, that he adopted the business model leading to the massive infringement, that he refuses to implement the technologies that could stop the infringement, and that he has paid users to upload files. The court concluded that, at the pleading stage, this suffices to show that he has the ability to supervise the infringing activity and a financial interest in that activity.