Copyright infringement – a startup killer

Most businesses are interlinked in some way or the other. Many startups may form companies based on existing businesses or existing products, but involving some unique business models or business strategies. In these scenarios, it is extremely important to look before you leap as you may fall into an intellectual property trap. Without clearly understanding the seriousness of certain IP rights, some startups have faced crucial problems, in some cases almost leading to business failure. Here are a few companies, worldwide, which have faced legal issues due to intellectual property infringement, mainly focusing on copyright infringement.

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1. Napster was quite a well known peer to the peer file sharing network which allowed sharing music online. It provided users with an easy medium to download copyrighted music for free. Any copyrighted material cannot be sold or distributed by anyone other than the copyright owner, except if prior permission is taken. But in this case, Napster was infringing on the rights of the record company and therefore it lead into a major copyright battle. Napster’s business model itself was to a large extent based on copyright infringement, which eventually lead them to bankruptcy after the infringement cases.
2. A US-based startup Boundless Learning conceptualized a business model based on providing free web based versions of popular college textbooks. Few of the top publishing companies like Pearson Education Inc., Cengage Learning Inc. and Macmillan Higher Education accused Boundless Learning of illegally using copyrighted content which was originally published by these publishing giants. They were sued by these three publishing companies and fought a 21 month-long legal battle. At the end of it, Boundless Learning was able to come to a confidential settlement with these publishing giants, which did not lead them to failure or bankruptcy. They were able to continue their business on alternative models/strategies, but this left them with a black mark and a huge loss of financials.
3. Another US-based technology company Aereo had a business model based on providing over-the-air-television on internet connected devices, using a unique technology. They leased antennae to users in order for them to view live broadcast of television and also record these broadcasts to be viewed at a later time. Several broadcast network companies argued that despite the use of a unique technology, the business model is similar to that of a cable television provider. It was argued that since Aereo had not obtained any permission from copyright holders, and since it was re-distributing broadcasts without paying the required fee, they were infringing the copyrights of broadcasters. The court ruled in favour of the broadcasting network companies, leading Aereo into bankruptcy.
4. Another US company ReDigi, an online market place for resale of pre owned digital music which is originally purchased from the iTunes store. The process adopted by ReDigi involved the digital reproduction of the music files from one digital storage medium to another for the purpose of selling music. Capitol Records filed a copyright infringement action against ReDigi and argued that reproducing music from one digital medium to another constitutes a violation of copyright protection. ReDigi claimed that uploading lawfully bought music file on the internet and selling through ReDigi’s services is not considered as an act of reproduction. But, the court ruled otherwise and ReDigi lost its law suit against Capital Records and was to pay a compensation of about $150,000 for ever infringed track. ReDigi has now modified its services to allow users to buy and sell pre owned music directly. A strong assumption of certain laws may lead companies into uncomfortable scenarios, so it is always essential to understand and interpret the laws in the right way.
5. Mp3.com, a company which functioned on a similar business model as ReDigi, had two websites Beam-it and Instant Listening programs. Beam-it allowed users to load their CD collection into online lockers at my.mp3.com and access their private music collections online. Instant Listening, on the other hand, allowed instant access to CDs purchased online from participating retailers. Even though the CD’s were being bought, and the users were required to supply their own copy, the CD’s contents were being digitally duplicated in order to be stored on their servers, for which Mp3.com failed to acquire licenses from the copyright holders; consequently causing a storm of lawsuits from major record labels. The law suit caused Mp3.com to shell out amounts as high as $35,000,000 in settlements. So, even though a business model may have some unique aspects, it is always important to ensure that the unique aspects don’t involve other people’s belongings.

These case studies show that business models that were based on the intellectual property rights of other companies, eventually lead to fatal outcomes. A business model should help raise revenue and not push the company into legal suits. One may conceptualize a business model not realising where an IP matter may crop up. Therefore, when basing business models on existing services, products or trades, always ensure that you safeguard yourself from encroaching onto other’s intellectual property.

About the authors:

This post is co-authored by Gaurav Singhal and Ananya Dhuddu. Gaurav is the Director and Principal IP Attorney at Patracode Services Pvt Ltd. A B.Tech in Computer Science, LLB from IIT-Kharagpur and Masters in Business Laws from National Laws School of India University, Gaurav has been working in the IPR field since many years. Ananya Dhuddu is an IP Analyst at Patracode Services Pvt. Ltd. She is a Life Sciences graduate from Pennsylvania State University, USA. She holds a PG Diploma in Medical Law and Ethics from National Law School of India University, Bangalore and a PG Diploma in IPR and Patent Management from GIIP, Bangalore.