$10 Settlement Offers: The Entertainment Industry’s New Copyright Tactic

Judges this year have shot down two unorthodox tactics used by the entertainment industry to collect money from file-sharers. But that hasn’t stopped content companies from trying yet another new trick — one that has so far escaped the scrutiny of the courts or the media.

We’ve discovered that content owners are using a small LA-based firm, Digital Rights Corp, to monitor file-sharing sites and send waves of email offers to alleged copyright infringers. The model is novel in that it is based on a massive scale and low-dollar amounts, and is implemented by means of technology and third parties.

The emails inform recipients that they may be liable for up to $150,000 because of copyright violations and that they are risk of having their Internet service cut off. Then comes this:

“If you click on the link below and login to the Rightscorp, Inc. automated settlement system, for $10 per infringement, you will receive a legal release from the copyright owner.”

The link directs the email recipient to a page where they are asked to enter a password that will let them get a settlement letter in exchange for $10. A sample release can be found on the company’s website.

In an interview with paidContent, Rightscorp executives explained that the company, acting as an agent for copyright holders, monitors peer-to-peer file sharing sites like BitTorrent. It collects the IP addresses — which identify individual internet subscribers — of alleged copyright violators and then instructs Internet service providers (ISPs) to send settlement offers on to subscribers. Rightscorp then takes a cut from anyone who pays the settlement.

Robert Steele, the firm’s COO, said that 75% of people who settle do so through the firm’s website while the rest do so over the telephone or by mail. The rate that Rightscorp uses for its settlement offers is $10 per infraction. But Steele said some copyright owners have provided Rightscorp with an “amnesty scale” that permits it to negotiate a lower settlement rate with those who are accused of multiple cases of infringement. This could mean, for instance, that someone whose child had downloaded 300 songs could offer to pay an amount lower than $3,000.

The firm would not say how many settlements it has collected. For now, Rightscorp says it is working only with music companies. But Steele says the technology also works for movies, ebooks and other content, and he expects those businesses will ultimately use the service too.

According to Steele, Rightscorp never sues anyone but instead aspires to educate them. “If someone has a bit torrent on their computer, that becomes a life-style,” he said. “People learn that there are consequences for uploading and downloading copyright material without any thought about it.”

Outsourcing Enforcement

For some time now, the music industry, in particular, has been wrestling with how best to go after file sharers. Over two years ago, it announced it would stop its controversial practice of suing consumers for downloading music. The lawsuits irked consumers and raised questions about their effectiveness and about the staggering penalties they produced. Several of these earlier cases are still before appeals courts, including one that resulted in a $675,000 verdict against a college student who allegedly downloaded 30 songs.

The Recording Industry Association of America, a lobby group, claims that piracy has wrecked the music industry and has campaigned vigorously to stop it. Although the industry has issued many studies about file-sharing, there was been wide skepticism about the empirical basis of the studies. Many observers of the music business believe that it’s nearly impossible to accurately verify piracy rates, including whether the incidence of piracy is up or down in recent years. The music industry has also been criticized for failing to distinguish between copyright infringement and legal forms of file-sharing.

Since the music industry announced its litigation truce in late 2008, other content owners have tried new and equally controversial tactics to pursue alleged copyright infringers. Two small newspaper chains, for instance, hired a company called Righthaven to work as a copyright mercenary, extracting settlements from people who cut and pasted news articles in return for a share of the proceeds. And pornography owners have unleashed a wave of so-called “John Doe” suits, in which lawyers sue thousands of defendants at once and then pressure individuals behind the scenes to pay a settlement in order to avoid public shaming. In the past several months, federal judges have put the brakes on both of these models while blasting their moral and legal basis.

With Rightscorp’s $10 settlement model, the music industry appears to have found an under-the-radar method to pursue and deter downloaders that might also avoid the legal and public relations headaches associated with previous efforts. Unlike early efforts to extract massive judgments from a relative handful of people, the Rightscorp gambit relies instead on vacuuming up small awards from a much larger pool of defendants. The practice of relying on Rightscorp and ISPs to send notices also relieves the industry of having to be the public face of the enforcement effort.

In response to questions about Rightscorp and its use of settlement offers, a spokesperson for the RIAA declined to comment.

Rightscorp says its technology means that much of the work of identifying and notifying alleged infringers is now automated. It is hard to determine just how many notices the company is sending, but recent legal filings provide a clue. On two occasions, Rightscorp has obtained subpoenas in Chicago federal court against ISPs that refused to pass along the settlement letters to alleged infringers. Included with each subpoena notice is a massive document that contains a printout of offers to more than a thousand alleged copyright infringers. Each settlement letter lists a song name and the date of infringement. Here is an excerpt:

Re: Unauthorized Use of Copyrights Owned Exclusively by 23rd Street
The file Vangelis – Yanni – Almost A Whisper.mp3 was infringed upon by a
computer at IP Address on 2011-03-12 05:32:52.0 .

The two companies that received the subpoenas, Windstream and Mediacom, are relatively small ISPs. If Rightscorp is being truthful that most ISPs in the country have agreed to forward the settlement letters, that could mean that hundreds of thousands of people have received them. We contacted two of the country’s largest ISPs, Time Warner (NYSE: TWX) and Comcast (NSDQ: CMCSA), to ask about Rightscorp, but neither responded.

Novel Legal Theory

Rightscorp says its tactic is highly effective not just at extracting settlements but also in reducing piracy. It claims that unauthorized sharing of one client’s song decreased from 20,000 to 4,000 in the month after its settlement offers were issued. If these figures are true, other sectors of the content industry will no doubt want to give it a try.

Yet, as with other enforcement initiatives, it is unclear if this new tactic is legal. In the case of Righthaven, a federal court ruled this summer that the firm did not have legal standing to enforce the copyright on behalf of the newspapers that owned it. And in the case of the pornography lawsuits, a judge slammed the lawyers involved for abusing the legal process. More generally, courts are likely to raise due-process questions about any litigation tactic that targets a large and heterogeneous pool of defendants.

Rightscorp executives repeatedly said “we don’t litigate.” Yet the company has already been to court twice to obtain subpoenas, and its settlement offers contain a number of stern legal warnings. It seems a decent bet that this new copyright enforcement tactic will end up in court sooner or later.

If the Rightscorp settlements do land in court, the case will likely turn on a section of the Digital Millennium Copyright Act that describes the role of ISPs in copyright enforcement. Under the section (512i), ISPs must have a policy in place in regard to “repeat infringers” if they want to preserve immunity from being sued by copyright holders. This immunity, known as a “safe harbor,” protects ISP’s and websites that host third party content. Safe harbors were included in the DMCA as a policy goal to facilitate the growth of the Internet.

But Rightscorp CEO Christopher Sabec, a former entertainment industry lawyer, says safe harbors can be lost if publishers or ISPs are shown to be tolerating repeat infringers, and that is the pitch he has used to persuade ISPs to work with Rightscorp. He argues that ISPs worried about protecting their safe harbor status have been cooperating with Rightscorp because the company is showing them evidence of repeat infringers on their network.

Not everyone agrees with that. Corynne McSherry, a lawyer and copyright expert with the Electronic Frontier Foundation, a San Francisco organization that advocates for digital rights for consumers, says ISPs’ legal obligations when it comes to potential copyright violators don’t extend to sending them settlement notices. She also believes that this tactic puts ISPs in a precarious position morally. “I find it appalling. I think ISPs main obligation is to their customers and investors.”

Traditionally, ISP’s have resisted pressure from the content industry to take an active role in copyright enforcement. That began to change in July, when the country’s largest ISP’s agreed to work with copyright holders by sending suspect infringers a series of escalating warnings about their actions.

Apparenlty, the ISPs have now agreed to do more than that.