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On April 30 one of the largest, and last completely free, online music-streaming services, Grooveshark, closed its doors in compliance with a settlement agreement over numerous copyright infringement claims. The company faced over 5,000 copyright infringement claims, which could have totaled more than $736 million.

Grooveshark’s business model was to allow a boasted 35 million users to upload songs to their servers, and then stream said music over computer or mobile devices. Legally, Grooveshark relied copyright “Safe Harbors” provisions to insulate itself from infringing behavior of third parties, such as uploading unlicensed music. This model is similar to YouTube, who also relies on user-uploaded content and copyright “Safe Harbor” provisions. However Grooveshark’s unique reliance on (and subsequent admitted misuse of) the copyright “Safe Harbors” illustrates an important pattern of behavior for all other companies in the rapidly growing space of online music-streaming to avoid.

The Digital Millennium Rights Act (DMCA) “Safe Harbors” are meant to shelter service providers from the infringing conduct of third parties using their services. To take advantage of this protection, certain conditions must be met: Service provider lacks actual knowledge (or not aware of facts or circumstances) of infringing activity; Where service provider has the right and ability to control infringing activity, must not derive a financial benefit directly attributable to the activity; Upon notification of claimed infringement service provider must act “expeditiously” to remove content; An officer must be designated to receive claims of infringement. (17. U.S.C. §512(c)) In essence the statute reads that the service provider must have both 1) ignorance of infringing activity, and 2) due diligence practices to remove infringing content when made aware. Grooveshark failed on both accounts, leading a judge on March 25 to conclude in summary judgment that it was not entitled to the “Safe Harbors” defense.

Specifically, Grooveshark had encouraged its employees to upload music to their servers in an effort to build their catalogue. Additionally, it was held the company had an insufficient record keeping system, and actively prevented copyright holders from gathering data necessary for DMCA takedown requests.

A “Safe Harbors” defense requires both 1) ignorance of infringing activity, and 2) due diligence…

Up until this point Grooveshark had maintained they were in compliance with the elements of the “Safe Harbors” provisions, and claimed they were implementing changes such as a three-strikes takedown policy, and registry of repeat offenders. However, as this case shows, it is the function of the service that will dictate its liability, rather than the form.

TIDAL all have licensing deals that cover their entire catalogs of songs. This is an incredibly expensive proposition however, taking up an average 70% of a streaming company’s revenue. Services like YouTube work with artists to develop licensing agreements where possible, and are seen as a cooperative partner in responding to infringing content takedown notices. Grooveshark on the other hand did not make any attempts to license songs in its catalogue, and was seen as unresponsive to numerous copyright infringement notices.

For companies moving forward in the online music-streaming space, the lesson here is that you cannot have your cake and “safely” eat it too. Grooveshark may have annoyed the music industry by avoiding any and all licensing agreements, but they flaunted the rules by encouraging their employees to willfully infringe and upload content, and ignoring any notices of infringement. As the field of online music-streaming is rapidly emerging from its infancy, a line in the sand has been drawn for other companies not to cross: Pay the licensing fees or remove infringing content, if not, the rules will come back to bite even a shark.

This case points out the need for competent and diligent legal advice when moving forward in the online music-streaming field. Please feel free to contact us at any time for any of the articles.

The Sinking of Grooveshark