Text of the Scientology v. Erhlich/Netcom decision

[David Smith]

This is an important case to track. What are the responsibilities of a=20
service provider in respect to civil and criminal violations by their=20
users? What level of responsibility is required in day-to-day=20
activities? How about if you are notified about a possible=20
infringement? Finally, how is a service provider supposed to make an=20
intelligent assessment of an allegation of copyright, defamation, or=20
similiar intellectual property violation claim?=20

---------- Forwarded message ----------
>Date: Tue, 12 Dec 1995 00:29:14 -0500
>From: Steve Barber <sba...@echonyc.com>
>To: Multiple recipients of list <nat...@echonyc.com>
>Subject: REPOST: D

[I inadvertently lost some text while formatting this yesterday. Below
is what I hope is the complete version of the opinion in the
"Scientology v. Erlich/Netcom" case. My apologies. -Steve Barber]
=20
IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

RELIGIOUS TECHNOLOGY CENTER, a California non-profit corporation; and
BRIDGE PUBLICATIONS, INC., a California non-profit corporation,
Plaintiffs,

v.

NETCOM ON-LINE COMMUNICATION SERVICES, INC., a Delaware corporation;
DENNIS ERLICH, an individual; and TOM KLEMESRUD, an individual, dba
CLEARWOOD DATA SERVICES, Defendants.

NO. C-95-20091 RMW

ORDER DENYING DEFENDANT NETCOM'S MOTION FOR SUMMARY JUDGMENT; DENYING
DEFENDANT KLEMESRUD'S MOTION FOR JUDGMENT ON THE PLEADINGS; AND
DENYING PLAINTIFFS' MOTION FOR PRELIMINARY INJUNCTION AGAINST NETCOM
AND KLEMESRUD

This case concerns an issue of first impression regarding intellectual
property rights in cyberspace.[n1] Specifically, this order addresses
whether the operator of a computer bulletin board service ("BBS"), and
the large Internet[n2] access provider that allows that BBS to reach
the Internet, should be liable for copyright infringement committed by
a subscriber of the BBS.

Plaintiffs Religious Technology Center ("RTC") and Bridge
Publications, Inc. ("BPI") hold copyrights in the unpublished and
published works of L. Ron Hubbard, the late founder of the Church of
Scientology ("the Church"). Defendant Dennis Erlich ("Erlich")[n3] is
a former minister of Scientology turned vocal critic of the Church,
whose pulpit is now the Usenet newsgroup[n4] alt.religion.scientology
("a.r.s."), an on-line forum for discussion and criticism of
Scientology. Plaintiffs maintain that Erlich infringed their
copyrights when he posted portions of their works on a.r.s. Erlich
gained his access to the Internet through defendant Thomas Klemesrud's
("Klemesrud's") BBS "support.com." Klemesrud is the operator of the
BBS, which is run out of his home and has approximately 500 paying
users. Klemesrud's BBS is not directly linked to the Internet, but
gains its connection through the facilities of defendant Netcom
On-Line Communications, Inc. ("Netcom"), one of the largest providers
of Internet access in the United States.

After failing to convince Erlich to stop his postings, plaintiffs
contacted defendants Klemesrud and Netcom. Klemesrud responded to
plaintiffs' demands that Erlich be kept off his system by asking
plaintiffs to prove that they owned the copyrights to the works posted
by Erlich. However, plaintiffs refused Klemesrud's request as
unreasonable. Netcom similarly refused plaintiffs' request that Erlich
not be allowed to gain access to the Internet through its
system. Netcom contended that it would be impossible to prescreen
Erlich's postings and that to kick Erlich off the Internet meant
kicking off the hundreds of users of Klemesrud's BBS. Consequently,
plaintiffs named Klemesrud and Netcom in their suit against Erlich,
although only on the copyright infringement claims.[n5]

On June 23, 1995, this court heard the parties' arguments on eight
motions, three of which relate to Netcom and Klemesrud and are
discussed in this order: (1) Netcom's motion for summary judgment; (2)
Klemesrud's motion for judgment on the pleadings;[n6] and (3)
plaintiffs' motion for a preliminary injunction against Netcom and
Klemesrud. For the reasons set forth below, the court grants in part
and denies in part Netcom's motion for summary judgment and
Klemesrud's motion for judgment on the pleadings and denies
plaintiffs' motion for a preliminary injunction.

I. NETCOM'S MOTION FOR SUMMARY JUDGMENT OF NONINFRINGEMENT =20

A. Summary Judgment Standards

Because the court is looking beyond the pleadings in examining this
motion, it will be treated as a motion for summary judgment rather
than a motion to dismiss. Grove v. Mead School District, 753 F.2d
1528, 1532(9thCir. 1985). Summary judgment is proper when "the
pleadings, depositions, answers to interrogatories, and admissions on
file, together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party is
entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). There
is a "genuine" issue of material fact only when there is sufficient
evidence such that a reasonable juror could find for the party
opposing the motion. Anderson v. Liberty Lobby. Inc., 477 U.S. 242,
251-52 (1986). Entry of summary judgment is mandated against a party
if, after adequate time for discovery and upon motion, the party fails
to make a showing sufficient to establish the existence of an element
essential to that party's case, and on which that party will bear the
burden of proof at trial. Celotex Corp. v. Catrett~ 477 U.S. 317, 322
(1986). The court, however, must draw all justifiable inferences in
favor of the nonmoving parties, including questions of credibility and
of the weight to be accorded particular evidence. Masson v. New Yorker
Magazine. Inc.. 501 U.S. 496, 520 (1991).

B. Copyright Infringement

To establish a claim of copyright infringement, a plaintiff must
demonstrate (1) ownership of a valid copyright and (2) "copying"' of
protectable expression by the defendant. Baxter v. MCA. Inc., 812 F.2d
421, 423 (9th Cir.), cert. denied. 484 U.S. 954 (1987). Infringement
occurs when a defendant violates one of the exclusive rights of the
copyright holder. 17 U.S.C. Section 501(a). These rights include the
right to reproduce the copyrighted work, the right to prepare
derivative works, the right to distribute copies to the public, and
the right to publicly display the work. 17 U.S.C. Sections 106(1)-(3)
& (5). The court has already determined that plaintiffs have
established that they own the copyrights to all of the Exhibit A and B
works, except item 4 of Exhibit A.[n8] The court also found plaintiffs
likely to succeed on their claim that defendant Erlich copied the
Exhibit A and B works and was not entitled to a fair use
defense. Plaintiffs argue that, although Netcom was not itself the
source of any of the infringing materials on its system, it
nonetheless should be liable for infringement, either directly,
contributorily, or vicariously.9 Netcom disputes these theories of
infringement and further argues that it is entitled to its own fair
use defense.

1. Direct Infringement=20

Infringement consists of the unauthorized exercise of one of the
exclusive rights of the copyright holder delineated in section 106. 17
U.S.C. Section 501. Direct infringement does not require intent or any
particular state of mind,'=F8 although willfulness is relevant to the
award of statutory damages. 17 U.S.C. Section 504(c).

Many of the facts pertaining to this motion are undisputed. The court
will address the relevant facts to determine whether a theory of
direct infringement can be supported based on Netcom's alleged
reproduction of plaintiffs' works. The court will look at one
controlling Ninth Circuit decision addressing copying in the context
of computers and two district court opinions addressing the liability
of BBS operators for the infringing activities of subscribers. The
court will additionally examine whether Netcom is liable for
infringing plaintiffs' exclusive rights to publicly distribute and
display their works.

a. Undisputed Facts=20

The parties do not dispute the basic processes that occur when Erlich
posts his allegedly infringing messages to a.r.s. Erlich connects to
Klemesrud's BBS using a telephone and a modem. Erlich then transmits
his messages to Klemesrud's computer, where they are automatically
briefly stored. According to a prearranged pattern established by
Netcom's software, Erlich's initial act of posting a message to the
Usenet results in the automatic copying of Erlich's message from
Klemesrud's computer onto Netcom's computer and onto other computers
on the Usenet. In order to ease transmission and for the convenience
of Usenet users, Usenet servers maintain postings from newsgroups for
a short period of time eleven days for Netcom's system and three days
for Klemesrud's system. Once on Netcom's computers, messages are
available to Netcom's customers and Usenet neighbors, who may then
download the messages to their own computers. Netcom's local server
makes available its postings to a group of Usenet servers, which do
the same for other servers until all Usenet sites worldwide have
obtained access to the postings, which takes a matter of
hours. Francis Decl. Paragraph 5.

Unlike some other large on-line service providers, such as CompuServe,
America Online, and Prodigy, Netcom does not create or control the
content of the information available to its subscribers. It also does
not monitor messages as they are posted. It has, however, suspended
the accounts of subscribers who violated its terms and conditions,
such as where they had commercial software in their posted
files. Netcom admits that, although not currently configured to do
this, it may be possible to reprogram its system to screen postings
containing particular words or coming from particular
individuals. Netcom, however, took no action after it was told by
plaintiffs that Erlich had posted messages through Netcom's system
that violated plaintiffs' copyrights, instead claiming that it could
not shut out Erlich without shutting out all of the users of
Klemesrud's BBS.

b. Creation of Fixed Copies

The Ninth Circuit addressed the question of what constitutes
infringement in the context of storage of digital information in a
computer's random access memory ("RAM"). MAI Systems Corp, v. Peak
Computer, Inc.., 991 F.2d 511, 518 (9th Cir. 1993). In Mai, the Ninth
Circuit upheld a Ending of copyright infringement where a repair
person. who was not authorized to use the computer owner's licensed
operating system software, turned on the computer, thus loading the
operating system into RAM for long enough to check an "error log." Id
at 518-19. Copyright protection subsists in original works of
authorship "fixed in any tangible medium of expression, now known or
later developed, from which they can be perceived, reproduced, or
otherwise communicated, either directly or with the aid of a machine
or device." 17 U.S.C. Section 102 (emphasis added). A work is "fixed"
when its "embodiment in a copy perceived, reproduced, or otherwise
communicated for a period of more than transitory duration." Id
Section 101. MAI established that the loading of data from a storage
device into RAM constitutes copying because that data stays in RAM
long enough for it to be perceived. MAI Systems, 991 F.2d at518.

In the present case, there is no question after "that "copies" were
created, as Erlich's act of sending a message to a.r.s. caused
reproductions of portions of plaintiffs' works on both Klemesrud's and
Netcom's storage devices. Even though the messages remained on their
systems for at most eleven days, they were sufficiently "fixed" to
constitute recognizable copies under the Copyright Act. See
Information Infrastructure Task Force, Intellectual Property and the
National Information Infrastructure: The Report of the Working Group
on Intellectual Property Rights 66 (1995) ("IITF Report").

c. Is Netcom Directly Liable for Making the Copies?

Accepting that copies were made, Netcom argues that Erlich, and not
Netcom, is directly liable for the copying. MAI did not address the
question raised in this case: whether possessors of computers are
liable for incidental copies automatically made on their computers
using their software as part of a process initiated by a third
party. Netcom correctly distinguishes MAI on the ground that Netcom
did not take any affirmative action that directly resulted in copying
plaintiffs' works other than by installing and maintaining a system
whereby software automatically forwards messages received from
subscribers onto the Usenet, and temporarily stores copies on its
system. Netcom's actions, to the extent that they created a copy of
plaintiffs' works, were necessary to having a working system for
transmitting Usenet postings to and from the Internet. Unlike the
defendants in MAI, neither Netcom nor Klemesrud initiated the
copying. The defendants in MAI turned on their customers' computers
thereby creating temporary copies of the operating system, whereas
Netcom' s and Klemesrud's systems can operate without any human
intervention. Thus, unlike MAI, the mere fact that Netcom's system
incidentally makes temporary copies of plaintiffs' works does not mean

Netcom has caused the copying.[n11] The court believes that Netcom's
act of designing or implementing a system that automatically and
uniformly creates temporary copies of all data sent through it is not
unlike that of the owner of a copying machine who lets the public make
copies with it.[n12] Although some of the people using the machine may
directly infringe copyrights, courts analyze the machine owner's
liability under the rubric of contributory infringement, not direct
infringement. See. e.g., RCA Records v. All-Fast System, Inc., 594
F. Supp. 335 (S.D.N.Y. 1984); 3 Melville B. Nimmer & David Nimmer,
NIMMER ON COPYRIGHT Section 12.04[A][2][b], at 12-78 to -79 (1995)
(''NIMMER ON COPYRIGHT"); Elkin-Koren, supra, at 363 (arguing that
"contributory infringement is more appropriate for dealing with BBS
liability, first, because it focuses attention on the BBS-users
relationship and the way imposing liability on BBS operators may shape
this relationship, and second because it better addresses the
complexity of the relationship between BBS operators and
subscribers"). Plaintiffs' theory would create many separate acts of
infringement and, carried to its natural extreme, would lead to
unreasonable liability. It is not difficult to conclude that Erlich
infringes by copying a protected work onto his computer and by posting
a message to a newsgroup. However, plaintiffs' theory further
implicates a Usenet server that carries Erlich's message to other
servers regardless of whether that server acts without any human
intervention beyond the initial setting up of the system. It would
also result in liability for every single Usenet server in the
worldwide link of computers transmitting Erlich's message to every
other computer. These parties, who are liable under plaintiffs'
theory, do no more than operate or implement a system that is
essential if Usenet messages are to be widely distributed. There is no
need to construe the Act to make all of these parties
infringers. Although copyright is a strict liability statute, there
should still be some element of volition or causation which is lacking
where a defendant's system is merely used to create a copy by a third
party.

Plaintiffs point out that the infringing copies resided for eleven
days on Netcom's computer and were sent out from it onto the
"Information Superhighway." However, under plaintiffs' theory, any
storage of a copy that occurs in the process of sending a message to
the Usenet is an infringement. While it is possible that less "damage"
would have been done if Netcom had heeded plaintiffs' warnings and
acted to prevent Erlich's message from being forwarded,[n13] this is
not relevant to its direct liability for copying. The same argument is
true of Klemesrud and any Usenet server. Whether a defendant makes a
direct copy that constitutes infringement cannot depend on whether it
received a warning to delete the message. See
D.C. Comics. Inc. v. Mini Gift, 912 F.2d 29, 35 (2d Cir. 1990). This
distinction may be relevant to contributory infringement, however,
where knowledge is an element. See infra part I.B.2.a. The court will
now consider two district court opinions that have addressed the
liability of BBS operators for infringing files uploaded by
subscribers.

d. Playboy Case Playboy Enterprises. Inc. v. Frena involved a suit
against the operator of a small BBS whose system contained files of
erotic pictures. 839 F. Supp. 1552, 1534 (M.D. Fla 1993). A subscriber
of the defendant's BBS had uploaded files containing digitized
pictures copied from the plaintiff's copyrighted magazine, which files
remained on the BBS for other subscribers to download. Id. The court
did not conclude, as plaintiffs suggest in this case, that the BBS is
itself liable for the unauthorized reproduction of plaintiffs' work;
instead, the court concluded that the BBS operator was liable for
violating the plaintiff's right to publicly distribute and display
copies of its work. Id at 1556-57.

In support of their argument that Netcom is directly liable for
copying plaintiffs' works, plaintiffs cite to the court's conclusion
that "[t]here is no dispute that [the BBS operator] supplied a product
containing unauthorized copies of a copyrighted work. It does not
matter that [the BBS operator] claims he did not make the copies
[him]self." D at 1556. It is clear from the context of this
discussion[n14] that the Playboy court was looking only at the
exclusive right to distribute copies to the public, where liability
exists regardless of whether the defendant makes copies. Here,
however, plaintiffs do not argue that Netcom is liable for its public
distribution of copies. Instead, they claim that Netcom is liable
because its computers in fact made copies. Therefore, the above-quoted
language has no bearing on the issue of direct liability for
unauthorized reproductions. Notwithstanding Playboy's holding that a
BBS operator may be directly liable for distributing or displaying to
the public copies of protected works,[n15] this court holds that the
storage on a defendant's system of infringing copies and
retransmission to other servers is not a direct infringement by the
BBS operator of the exclusive right to reproduce the work where such
copies are uploaded by an infringing user. Playboy does not hold
otherwise.[n16]

e. Sega Case

A court in this district addressed the issue of whether a BBS operator
is liable for copyright infringement where it solicited subscribers to
upload files containing copyrighted materials to the BBS that were
available for others to download. Sega Enterprises Ltd. v. MAPHIA, 857
F. Supp. 679, 683 (N.D. Cal. 1994). The defendant's "MAPHIA" BBS
contained copies of plaintiff Sega's video game programs that were
uploaded by users. Id. at 683. The defendant solicited the uploading
of such programs and received consideration for the right to download
files. IL Access was given for a fee or to those purchasing the
defendant's hardware device that allowed Sega video game cartridges to
be copied. Id at 683-84. The court granted a preliminary injunction
against the defendant, finding that plaintiffs had shown a prima facie
case of direct and contributory infringement. Id at 687. The court
found that copies were made by unknown users of the BBS when files
were uploaded and downloaded. Id. Further, the court found that the
defendant's I knowledge of the infringing activities, encouragement,
direction and provision of the facilities through his operation of the
BBS constituted contributory infringement, even though the defendant
did not know exactly when files were uploaded or downloaded. Id. at
686-87.

This court is not convinced that Sega provides support for a finding
of direct infringement where copies are made on a defendant's BBS by
users who upload files. Although there is some language in Sega
regarding direct infringement, it is entirely conclusory:

Sega has established a prima facie case of direct copyright
infringement under 17 U.S.C. Section 501. Sega has established that
unauthorized copies of its games are made when such games are uploaded
to the MAPHIA bulletin board, here with the knowledge of Defendant
Scherman. These games are thereby placed on the storage media of the
electronic bulletin board by unknown users. Id. at 686 (emphasis
added). The court's reference to the "knowledge of Defendant"
indicates that the court was focusing on contributory infringement, as
knowledge is not an element of direct infringement. Perhaps, Sega's
references to direct infringement and that "copies . . . are made" are
to the direct liability of the "unknown users," as there can be no
contributory infringement by a defendant without direct infringement
by another. See 3 NIMMER ON COPYRIGHT Section 12.04[A][3][a], at
12-89. Thus, the court finds that neither Playboy nor Sega requires
finding Netcom liable for direct infringement of plaintiffs' exclusive
right to reproduce their works.[n17]

f. Public Distribution and Display?

Plaintiffs allege that Netcom is directly liable for making copies of
their works. See FAC 25. They also allege that Netcom violated their
exclusive rights to publicly display copies of their works. FAC m 44,
51. There are no allegations that Netcom violated plaintiffs'
exclusive right to publicly distribute their works. However, in their
discussion of direct infringement, plaintiffs insist that Netcom is
liable for "maintain[ing] copies of [Erlich's] messages on its server
for eleven days for access by its subscribers and 'USENET neighbors"'
and they compare this case to the Playboy case, which discussed the
right of public distribution. Opp'n at 7. Plaintiffs also argued this
theory of infringement at oral argument. Tr.[n18] 5:22. Because this
could be an attempt to argue that Netcom has infringed plaintiffs'
rights of public distribution and display, the court will address
these arguments.

Playboy concluded that the defendant infringed the plaintiff s
exclusive rights to publicly ; distribute and display copies of its
works. 839 F. Supp. at 1556-57. The court is not entirely convinced
that the mere possession of a digital copy on a BBS that is accessible
to some members of the public constitutes direct infringement by the
BBS operator. Such a holding suffers from the same problem of
causation as the reproduction argument. Only the subscriber should be
liable for causing the distribution of plaintiffs' work, as the
contributing actions of the BBS provider are automatic and
indiscriminate. Erlich could have posted his messages through
countless access providers and the outcome would be the same: anyone
with access to Usenet newsgroups would be able to read his
messages. There is no logical reason to draw a line around Netcom and
Klemesrud and say that they are uniquely responsible for distributing
Erlich's messages. Netcom is not even the first link in the chain of
distribution-Erlich had no direct relationship with Netcom but dealt
solely with Klemesrud's BBS, which used Netcom to gain its Internet
access. Every Usenet server has a role in the distribution, so
plaintiffs' argument would create unreasonable liability. Where the
BBS merely stores and passes along all messages sent by its
subscribers and others, the BBS should not be seen as causing these
works to be publicly distributed or displayed.

Even accepting the Playboy court's holding, the case is factually
distinguishable. Unlike the BBS in that case, Netcom does not maintain
an archive of files for its users. Thus, it cannot be said to be
"suppl[ying] a product." In contrast to some of its larger
competitors, Netcom does not create or control the content of the
information available to its subscribers; it merely provides access to
the Internet, whose content is controlled by no single
entity. Although the Internet consists of many different computers
networked together, some of which may contain infringing files, it
does not make sense to hold the operator of each computer liable as an
infringer merely because his or her computer is linked to a computer
with an infringing file. It would be especially inappropriate to hold
liable a service that acts more like a conduit, in other words, one
that does not itself keep an archive of files for more than a short
duration. Finding such a service liable would involve an unreasonably
broad construction of public distribution and display rights. No
purpose would be served by holding liable those who have no ability to
control the information to which their subscribers have access, even
though they might be in some sense helping to achieve the Internet's
automatic "public distribution" and the users' "public" display of
files.

g. Conclusion

The court is not persuaded by plaintiffs' argument that Netcom is
directly liable for the copies that are made and stored on its
computer. Where the infringing subscriber is clearly directly liable
for the same act, it does not make sense to adopt a rule that could
lead to the liability of countless parties whose role in the
infringement is nothing more than setting up and operating a system
that is necessary for the functioning of the Internet. Such a result
is unnecessary as there is already a party directly liable for causing
the copies to be made. Plaintiffs occasionally claim that they only
seek to hold liable a party that refuses to delete infringing files
after they have been warned. However, such liability cannot be based
on a theory of direct infringement, where knowledge is irrelevant. The
court does not find workable a theory of infringement that would hold
the entire Internet liable for activities that cannot reasonably be
deterred. Billions of bits of data flow through the Internet and are
necessarily stored on servers throughout the network and it is thus
practically impossible to screen out infringing bits from
noninfringing bits. Because the court cannot see any meaningful
distinction (without regard to knowledge) between what Netcom did and
what every other Usenet server does, the court finds that Netcom
cannot be held liable for direct infringement. Cf: IITF Report at 69
(noting uncertainty regarding whether BBS operator should be directly
liable for reproduction or distribution of files uploaded by a
subscriber).[n19]

2. Contributory Infringement

Netcom is not free from liability just because it did not directly
infringe plaintiffs' works; it may still be liable as a contributory
infringer. Although there is no statutory rule of liability for
infringement committed by others,

[t]he absence of such express language in the copyright statute does
not preclude the imposition of liability for copyright infringement on
certain parties who have not themselves engaged in the infringing
activity. For vicarious liability is imposed in virtually all areas of
the law, and the concept of contributory infringement is merely a
species of the broader problem of identifying the circumstances in
which it is just to hold one individual accountable for the actions of
another. Sony Corp. v. Universal City Studios. Inc, 464 U.S. 417, 435
(1984) (footnote omitted). Liability for participation in the
infringement will be established where the defendant, "with knowledge
of the infringing activity, induces, causes or materially contributes
to the infringing conduct of another." Gershwin Publishing Corp v
Columbia Artists Management. Inc., 443 F.2d 1159, 1162 (2d Cir. 1971).

a. Knowledge of Infringing Activity

Plaintiffs insist that Netcom knew that Erlich was infringing their
copyrights at least after receiving notice from plaintiffs' counsel
indicating that Erlich had posted copies of their works onto
a.r.s. through Netcom's system. Despite this knowledge, Netcom
continued to allow Erlich to post messages to a.r.s. and left the
allegedly infringing messages on its system so that Netcom's
subscribers and other Usenet servers could access them. Netcom argues
that it did not possess the necessary type of knowledge because (1) it
did not know of Erlich's planned infringing activities when it agreed
to lease its facilities to Klemesrud, (2) it did not know that Erlich
would infringe prior to any of his postings, (3) it is unable to
screen out infringing postings before they are made, and (4) its
knowledge of the infringing nature of Erlich's postings was too
equivocal given the difficulty in assessing whether the registrations
were valid and whether Erlich's use was fair. The court will address
these arguments in turn.

Netcom cites cases holding that there is no contributory infringement
by the lessors of premises that are later used for infringement unless
the lessor had knowledge of the intended use at the time of the
signing of the lease. See. e.g. Deutsch v. Arnold, 98 F.2d 686, 688
(2d Cir. 1938).[n20] The contribution to the infringement by the
defendant in Deutsch was merely to lease use of the premises to the
infringer. Here, Netcom not only leases space but also serves as an
access provider, which includes the storage and transmission of
information necessary to facilitate Erlich' s postings to
a.r.s. Unlike a landlord, Netcom retains some control over the use of
its system. See infra part I.B.3.a. Thus, the relevant time frame for
knowledge is not when Netcom entered into an agreement with
Klemesrud. It should be when Netcom provided its services to allow
Erlich to infringe plaintiffs' copyrights. Cf: Screen Gems-Columbia
Music. Inc. v. Mark-Fi Records. Inc., 256 F. Supp. 399, 403
(S.D.N.Y. 1966) (analyzing knowledge at time that defendant rendered
its particular service). It is undisputed that Netcom did not know
that Erlich was infringing before it received notice from
plaintiffs. Netcom points out that the alleged instances of
infringement occurring on Netcom' s system all happened prior to
December 29, 1994, the date on which Netcom first received notice of
plaintiffs' infringement claim against Erlich. See Pisani Feb. 8, 1995
Decl., s 6 & Exs. (showing latest posting made on December 29, 1994);
McShane Feb. 8, 1995 Decl.; FAC m 36-38 & Ex. I. Thus, there is no
question of fact as to whether Netcom knew or should have known of
Erlich's infringing activities that occurred more than 11 days before
receipt of the December 28, 1994 letter.

However, the evidence reveals a question of fact as to whether Netcom
knew or should have known that Erlich had infringed plaintiffs'
copyrights following receipt of plaintiffs' letter. Because Netcom was
arguably participating in Erlich's public distribution of plaintiffs'
works, there is a genuine issue as to whether Netcom knew of any
infringement by Erlich before it was too late to do anything about
it. If plaintiffs can prove the knowledge element, Netcom will be
liable for contributory infringement since its failure to simply
cancel Erlich's infringing message and thereby stop an infringing copy
from being distributed worldwide constitutes substantial participation
in Erlich's public distribution of the message. Cf R.T. Nimmer, THE
LAW OF COMPUTER TECHNOLOGY Paragraph 15.11 B, at S 15-42 (2d ed. 1994)
(opining that "where information service is less directly involved in
the enterprise of creating unauthorized copies, a finding of
contributory infringement is not likely").

Netcom argues that its knowledge after receiving notice of Erlich's
alleged infringing activities was too equivocal given the difficulty
in assessing whether registrations are valid and whether use is
fair. Although a mere unsupported allegation of infringement by a
copyright owner may not automatically put a defendant on notice of
infringing activity, Netcom's position that liability must be
unequivocal is unsupportable. While perhaps the typical infringing
activities of BBSs will involve copying software, where BBS operators
are better equipped to judge infringement, the fact that this involves
written works should not distinguish it. Where works contain copyright
notices within them, as here, it is difficult to argue that a
defendant did not know that the works were copyrighted. To require
proof of valid registrations would be impractical and would perhaps
take too long to verify, making it impossible for a copyright holder
to protect his or her works in some cases, as works are automatically
deleted less than two weeks after they are posted. The court is more
persuaded by the argument that it is beyond the ability of a BBS
operator to quickly and fairly determine when a use is not
infringement where there is at least a colorable claim of fair
use. Where a BBS operator cannot reasonably verify a claim of
infringement, either because of a possible fair use defense, the lack
of copyright notices on the copies, or the copyright holder's failure
to provide the necessary documentation to show that there is a likely
infringement, the operator' s lack of knowledge will be found
reasonable and there will be no liability for contributory
infringement for allowing the continued distribution of the works on
its system.

Since Netcom was given notice of an infringement claim before Erlich
had completed his infringing activity, there may be a question of fact
as to whether Netcom knew or should have known that such activities
were infringing. Given the context of a dispute between a former
minister and a church he is criticizing, Netcom may be able to show
that its lack of knowledge that Erlich was infringing was
reasonable. However, Netcom admits that it did not even look at the
postings once given notice and that had it looked at the copyright
notice and statements regarding authorship, it would have triggered an
investigation into whether there was infringement. Kobrin June 7, 1995
Decl., Ex. H, Hoffman Depo. At 125-128. These facts are sufficient to
raise a question as to Netcom's knowledge-once it received a letter
from plaintiffs on December 29, 1994.[n21]

b. Substantial Participation

Where a defendant has knowledge of the primary infringer's infringing
activities, it will be liable if it "induces, causes or materially
contributes to the infringing conduct of" the primary
infringer. Gershwin Publishing, 443 F.2d at 1162. Such participation
must be substantial. Apple Computer. Inc v. Microsoft Corp., 821
F. Supp. 616, 625 (N.D. Cal. 1993), aff'd, 35 F.3d 1435 (9th
Cir. 1994); Demetriades v. Kaufmann, 690 F. Supp. 289, 294
(S.D.N.Y. 1988).

Providing a service that allows for the automatic distribution of all
Usenet postings, infringing and noninfringing, goes well beyond
renting a premises to an infringer. See Fonovisa Inc. v. Cherry
Auction. Inc., 847 F. Supp. 1492, 1496 (E.D. Cal. 1994) (finding that
renting space at swap meet to known bootleggers not "substantial
participation" in the infringers' activities). It is more akin to the
radio stations that were found liable for rebroadcasting an infringing
broadcast. See. e.g., Select Theatres Corp. v. Ronzoni Macaroni Corp,
59 U.S.P.Q. 288, 291 (S.D.N.Y. 1943). . Netcom allows Erlich's
infringing messages to remain on its system and be further distributed
to other Usenet servers worldwide. It does not completely relinquish
control over how its system is used, unlike a landlord. Thus, it is
fair, assuming Netcom is able to take simple measures to prevent
further damage to plaintiffs' copyrighted works, to hold Netcom liable
for contributory infringement where Netcom has knowledge of Erlich's
infringing postings yet continues to aid in the accomplishment of
Erlich's purpose of publicly distributing the postings. Accordingly,
plaintiffs do raise a genuine issue of material fact as to their
theory of contributory infringement as to the postings made after
Netcom was on notice of plaintiffs' infringement claim.

3. Vicarious Liability

Even if plaintiffs cannot prove that Netcom is contributorily liable
for its participation in the infringing activity, it may still seek to
prove vicarious infringement based on Netcom' s relationship to
Erlich. A defendant is liable for vicarious liability for the actions
of a primary infringer where the defendant (1) has the right and
ability to control the infringer's acts and (2) receives a direct
financial benefit from the infringement. See Shapiro. Bernstein &
Co. v. H.L. Green Co., 316 F.2d 304, 306 (2d Cir. 1963). Unlike
contributory infringement, knowledge is not an element of vicarious
liability. 3 NIMMER ON COPYRIGHT Section 12.04[A][1], at 12-70.

a. Right and Ability To Control

The first element of vicarious liability will be met if plaintiffs can
show that Netcom has the right and ability to supervise the conduct of
its subscribers. Netcom argues that it does not have the right to
control its users' postings before they occur. Plaintiffs dispute this
and argue that Netcom's terms and conditions, to which its
subscribers[n22] must agree, specify that Netcom reserves the right to
take remedial action against subscribers. See. e.g., Francis Depo. at
124-126. Plaintiffs argue that under "netiquette," the informal rules
and customs that have developed on the Internet, violation of
copyrights by a user is unacceptable and the access provider has a
duty take measures to prevent this; where the immediate service
provider fails, the next service provider up the transmission stream
must act. See Castleman Decl. m 3243. Further evidence of Netcom's
right to restrict infringing activity is its prohibition of copyright
infringement and its requirement that its subscribers indemnify it for
any damage to third parties. See Kobrin May 5, 1995 Decl.,
Ex. G. Plaintiffs have thus raised a question of fact as to Netcom's
right to control Erlich's use of its services.

Netcom argues that it could not possibly screen messages before they
are posted given the speed and volume of the data that goes through
its system. Netcom further argues that it has never exercised control
over the content of its users' postings. Plaintiffs' expert opines
otherwise, stating that with an easy software modification Netcom
could identify postings that contain particular words or come from
particular individuals. Castleman Decl. m 39-43; see also Francis
Depo. at 262-63; Hoffman Depo. at 173-74, 178.[n23] Plaintiffs further
dispute Netcom's claim that it could not limit Erlich's access to
Usenet without kicking off all 500 subscribers of Klemesrud's BBS. As
evidence that Netcom has in fact exercised its ability to police its
users' conduct, plaintiffs cite evidence that Netcom has acted to
suspend subscribers' accounts on over one thousand occasions. See
Ex. J (listing suspensions of subscribers by Netcom for commercial
advertising, posting obscene materials, and off-topic
postings). Further evidence shows that Netcom can delete specific
postings. & Tr. 9:16. Whether such sanctions occurred before or after
the abusive conduct is not material to whether Netcom can exercise
control. The court thus finds that plaintiffs have raised a genuine
issue of fact as to whether Netcom has the right and ability to
exercise control over the activities of its subscribers, and of Erlich
in particular.

b. Direct Financial Benefit

Plaintiffs must further prove that Netcom receives a direct financial
benefit from the infringing activities of its users. For example, a
landlord who has the right and ability to supervise the tenant's
activities is vicariously liable for the infringements of the tenant
where the rental amount is proportional to the proceeds of the
tenant's sales. Shapiro. Bernstein, 316 F.2d at 306. However, where a
defendant rents space or services on a fixed rental fee that does not
depend on the nature of the activity of the lessee, courts usually
find no vicarious liability because there is no direct financial
benefit from the infringement. See. e.g., Roy Export Co. v. Trustees
of Columbia University, 344 F. Supp. 1350, 1353 (S.D.N.Y. 1972)
(finding no vicarious liability of university because no financial
benefit from allowing screening of bootlegged films); Fonovisa, 847
F. Supp. at 1496 (finding swap meet operators did not financially
benefit from fixed fee); see also Kelly Tickle, Comment, The Vicarious
Liability of Electronic Bulletin Board Operators for the Copyright
Infringement Occurring on Their Bulletin Boards, 80 IOWA L. REV. 391,
415 (1995) (arguing that BBS operators "lease cyberspace" and should
thus be treated like landlords, who are not liable for infringement
that occurs on their premises).

Plaintiffs argue that courts will find a financial benefit despite
fixed fees. In Polygram International
Publishing. Inc. v. Nevada/TIG. Inc., 855 F Supp. 1314, 1330-33
(D. Mass. 1994), the court found a trade show organizer vicariously
liable for the infringing performance of an exhibitor because,
although the infringement did not affect the fixed rental fee received
by the organizers, the organizers benefitted from the performances,
which helped make the show a financial success. Sat see Artists
Music. Inc. v. Reed Publishing, Inc., 31 U.S.P.Q. 2d 1623, 1994 WL
191643, at *6 (S.D.N.Y. 1994) (finding no vicarious liability for
trade show organizers where revenues not increased because of
infringing music performed by exhibitors). Plaintiffs cite two other
cases where, despite fixed fees, defendants received financial
benefits from allowing groups to perform infringing works over the
radio without having to get an ASCAP license, which minimized the
defendants' expenses. See Boz Scaggs Music v. KND Corp, 491 F
Supp. 980, 913 (D. Conn. 1980); Realsongs v. Gulf Broadcasting Corp.,
824 F. Supp. 89, 92 (M.D. La 1993). Plaintiffs' cases are factually
distinguishable. Plaintiffs cannot provide any evidence of a direct
financial benefit received by Netcom from Erlich's infringing
postings. Unlike Shapiro. Bernstein, and like Fonovisa, Netcom
receives a fixed fee. There is no evidence that infringement by
Erlich, or any other user of ;Netcom's services, in any way enhances
the value of Netcom's services to subscribers or attracts new
subscribers. Plaintiffs argue, however, that Netcom somehow derives a
benefit from its purported "policy of refusing to take enforcement
actions against its subscribers and others who transmit infringing
messages over its computer networks." Opp'n at 18. Plaintiffs point to
Netcom's advertisements that, compared to competitors like CompuServe
and America Online, Netcom provides easy, regulation-free Internet
access. Plaintiffs assert that Netcom's policy attracts copyright
infringers to its system, resulting in a direct financial benefit. The
court is not convinced that such an argument, if true, would
constitute a direct financial benefit to Netcom from Erlich's
'infringing activities. See Fonovisa 847 F. Supp. at 1496 (finding no
direct financial benefit despite 'argument that lessees included many
vendors selling counterfeit goods and that clientele sought t"bargain
basement prices"). Further, plaintiffs' argument is not supported by
probative evidence. The only "evidence" plaintiffs cite for their
supposition is the declaration of their counsel, Elliot Abelson, who
states that [o]n April 7, 1995, in a conversation regarding Netcom's
position related to this case, Randolf Rice, attorney for Netcom,
informed me that Netcom's executives are happy about the publicity it
is receiving in the press as a result of this case. Mr. Rice also told
me that Netcom was concerned that it would lose business if it took
action against Erlich or Klemesrud in connection with Erlich's
infringements. Abelson Decl. Paragraph 2. Netcom objects to this
declaration as hearsay and as inadmissible evidence of statements made
in compromise negotiations. Fed. R. Ev. 801, 408. Whether or not this
declaration is admissible, it does not support plaintiffs' argument
that Netcom either has a policy of not enforcing violations of
copyright laws by its subscribers or, assuming such a policy exists,
that Netcom's policy directly financially benefits Netcom, such as by
attracting new subscribers. Because plaintiffs have failed to raise a
question of fact on this vital element, their claim of vicarious
liability fails. See Roy Exports 344 F. Supp. at 1353.

4. First Amendment Argument

Netcom argues that plaintiffs' theory of liability contravenes the
first amendment, as it would chill the use of the Internet because
every access provider or user would be subject to liability when a
user posts an infringing work to a Usenet newsgroup. While the court
agrees that an overbroad injunction might implicate the First
Amendment, see In re Capital Cities/ABC. Inc, 918 F.2d 140, 144 (11 th
Cir. 1990),[n24] imposing liability for infringement where it is
otherwise appropriate does not necessarily raise a First Amendment
issue. The copyright concepts of the idea/expression dichotomy and the
fair use defense balance the important First Amendment rights with the
constitutional authority for "promot[ing] the progress of science and
useful arts," U.S. CONST. art. I, Section 8, cl. 8; 1 NIMMER ON
COPYRIGHT Section l.1O[B], at 1-71 to -83. Netcom argues that
liability here would force Usenet servers to perform the
impossible-screening all the information that comes through their
systems. However, the court is not convinced that Usenet servers are
directly liable for causing a copy to be made, and absent evidence of
knowledge and participation or control and direct profit, they will
not be contributorily or vicariously liable. If Usenet servers were
responsible for screening all messages coming through their systems,
this could have a serious chilling effect on what some say may turn
out to be the best public forum for free speech yet devised. a Jerry
Berman & Daniel J. Weitzner, Abundance and User Control: Renewing the
Democratic Heart of the First Amendment in the Age of Interactive
Media, 104 YALE L. J. 1619, 1624 (1995) (praising decentralized
networks for opening access to all with no entity stifling independent
sources of speech); Rose, supra at 4.[n25] Finally, Netcom admits that
its First Amendment argument is merely a consideration in the fair use
argument, which the court will now address. See Reply at 24.

5. Fair Use Defense

Assuming plaintiffs can prove a violation of one of the exclusive
rights guaranteed in section 106, there is no infringement if the
defendant's use is fair under section 108. The proper focus here is on
whether Netcom's actions qualify as fair use, not on whether Erlich
himself engaged in fair use; the court has already found that Erlich
was not likely entitled to his own fair use defense, as his postings
contained large portions of plaintiffs' published and unpublished
works quoted verbatim with little added commentary.

Although the author has the exclusive rights to reproduce, publicly
distribute, and publicly display a copyrighted work under section 106,
these rights are limited by the defense of "fair use." 17
U.S.C. Section 107. The defense "permits and requires courts to avoid
rigid application of the copyright statute when, on occasion, it would
stifle the very creativity which that law is designed to foster."
Campbell v. Acuff-Rose Music. Inc., 114 S. Ct. 1164, 1170 (1994)
(citation omitted). Congress has set out four nonexclusive factors to
be considered in determining the availability of the fair use defense:

( I ) the purpose and character of the use, including whether such use
is of a commercial nature or is for nonprofit educational purposes;
(2) the nature of the copyrighted work;

(3) the amount and substantiality of the portion used in relation to
the copyrighted work as a whole; and

(4) the effect of the use upon the potential market for or value of
the copyrighted work. 17 U.S.C. Section 107. The fair use doctrine
calls for a case-by-case analysis. Campbell, 114 S. Ct. at 1170. All
of the factors "are to be explored, and the results weighed together,
in light of the purposes of copyright." Id at 1170-71.

a. First Factor: Purpose and Character of the Use

The first statutory factor looks to the purpose and character of the
defendant's use. Netcom's use of plaintiffs' works is to carry out its
commercial function as an Internet access provider. Such a use,
regardless of the underlying uses made by Netcom's subscribers, is
clearly commercial. Netcom's use, though commercial, also benefits the
public in allowing for the functioning of the Internet and the
dissemination of other creative works, a goal of the Copyright
Act. See Sega v. Accolade 977 F.2d 1510, 1523 (9th Cir. 1992) (holding
that intermediate copying to accomplish reverse engineering of
software fair use despite commercial nature of activity; considering
public benefit of use). The Campbell Court emphasized that a
commercial use does not dictate against a finding of fair use, as most
of the uses listed in the statute are "generally conducted for profit
in this country." 114 S. Ct. at 1174. Although Netcom gains
financially from its distribution of messages to the Internet, its
financial incentive is unrelated to the infringing activity and the
defendant receives no direct financial benefit from the acts of
infringement. Therefore, the commercial nature of the defendant's
activity should not be dispositive. Moreover, there is no easy way for
a defendant like Netcom to secure a license for carrying ever,v
possible type of copyrighted work onto the Internet. Thus, it should
not be seen as "profit[ing] from the exploitation of the copyrighted
work without paying the customary prices." Harper &
Row. Publishers. Inc. v. Nation Enterprises, 471 U.S. 539, 562
(1985). It is undisputed that, unlike the defendants in Playboy and
Sega, Netcom does not directly gain anything from the content of the
information available to its subscribers on the Internet. See supra
part I.B.3.b. Because it does not itself provide the files or solicit
infringing works, its purpose is different from that of the defendants
in Playboy and Sega Because Netcom's use of copyrighted materials
served a completely different function than that of the plaintiffs,
this factor weighs in Netcom's favor, see Hustler
Magazine. Inc. v. Moral Majority. Inc.. 606 F. Supp. 1526, 1535
(C.D. Cal. 1985), aff'd, 796 F.2d 1148 (9th Cir. 1986),
notwithstanding the otherwise commercial nature of Netcom's use.

b. Second Factor: Nature of the Copyrighted Work

The second factor focuses on two different aspects of the copyrighted
work: whether it is published or unpublished and whether it is
informational or creative.[n26] Plaintiffs rely on the fact that some
of the works transmitted by Netcom were unpublished and some were
arguably highly creative and original. However, because Netcom's use
of the works was merely to facilitate their posting to the Usenet,
which is an entirely different purpose than plaintiffs' use (or, for
that matter, Erlich's use), the precise nature of those works is not
important to the fair use determination. a Campbell, 114 S. Ct. at
1175 (finding creative nature of work copied irrelevant where copying
for purposes of parody); Hustler Magazine. 606 F. Supp. at 1537; 3
NIMMER ON COPYRIGHT Section 13.05[A][2][a], at 13177 ("It is sometimes
necessary, in calibrating the fair use defense, to advert to the
defendant's usage simultaneously with the nature of the plaintiff's
work.").

c. Third Factor: Amount and Substantiality of the Portion Used

The third factor concerns both the percentage of the original work
that was copied and whether that portion constitutes the "heart" of
the copyrighted work. Harper & Row, 471 U.S. at 564-65. Generally, no
more of a work may be copied than is necessary for the particular
use. See Supermarket of Homes v. San Fernando Valley Board of Realtors
786 F.2d 1400, 1409 (9th Cir. 1986). The copying of an entire work
will ordinarily militate against a finding of fair use, although this
is not a per se rule. Sony, 464 U.S. at 449-450.

Plaintiffs have shown that Erlich's postings copied substantial
amounts of the originals or, in some cases, the entire works. Netcom,
of course, made available to the Usenet exactly what was posted by
Erlich. As the court found in Sony, the mere fact that all of a work
is copied is not determinative of the fair use question, where such
total copying is essential given the purpose of the copying. Id
(allowing total copying in context of time-shifting copyrighted
television shows by home viewers). For example, where total copying
was necessary to carry out the defendants' beneficial purpose of
reverse engineering software to get at the ideas found in the source
code, the court found fair use. Sega v. Accolade, 977 F.2d at
1526-27. Here, Netcom copied no more of plaintiffs' works than
necessarily.v to function as a Usenet server. Like the defendant in
Sega v. Accolade, Netcom had no practical alternative way to carry out
its socially useful purpose; a Usenet server must copy all files,
since the prescreening of postings for potential copyright
infringement is not feasible. 977 F.2d at 1526. Accordingly, this
factor should not defeat an otherwise valid defense.

d. Fourth Factor: Effect of the Use upon the Potential Market for the
Work

The fourth and final statutory factor concerns "the extent of market
harm caused by the particular actions of the alleged infringer" and
"'whether unrestricted and widespread conduct of the sort engaged in
by the defendant . . . would result in a substantially adverse impact
on the potential market' for the original." Campbell, 114 S. Ct. at
1177 (quoting 3 NIMMER ON COPYRIGHT Section 13.05 [A][4]) (remanding
for consideration of this factor). Although the results of all four
factors must be weighed together, id at 1171, the fourth factor is the
most important consideration, 3 NIMMER ON COPYRIGHT Section
13.05[A][4], at 13-188 to -189 (citing Harper & Row, 471 U.S. at 566),
13-207 (observing that fourth factor explains results in recent
Supreme Court cases).

Netcom argues that there is no evidence that making accessible
plaintiffs' works, which consist of religious scriptures and policy
letters, will harm the market for these works by preventing someone
from participating in the Scientology religion because they can view
the works on the Internet instead. Further, Netcom notes that the
relevant question is whether the postings fulfill the demand of an
individual who seeks to follow the religion's teachings, and not
whether they suppress the desire of an individual who is affected by
the criticism posted by Erlich. Netcom argues that the court must
focus on the "normal market" for the copyrighted work, which in this
case is through a Scientology-based organization. Plaintiffs respond
that the Internet's extremely widespread distribution-where more than
25 million people worldwide have access-multiplies the effects of
market substitution. In support of its motion for a preliminary
injunction against Erlich, plaintiffs submitted declarations regarding
the potential effect of making the Church's secret scriptures
available over the Internet. Plaintiffs point out that, although the
Church currently faces no competition, groups in the past have used
stolen copies of the Church's scriptures in charging for
Scientology-like religious training. See. e.g., Bridge
Publications. Inc. v. Vien, 827 F. Supp. 629, 633-34 (S.D. Cal. 1993);
Religious Technology Center v. Wollersheim, 796 F.2d 1076, 1078-79
(9th Cir. 1986), cert. denied, 479 U.S. 1103 (1987). This evidence
raises a genuine issue as to the possibility that Erlich's postings,
made available over the Internet by Netcom, could hurt the market for
plaintiffs' works.

e. Equitable Balancing

In balancing the various factors, the court finds that there is a
question of fact as to whether there is a valid fair use
defense. Netcom has not justified its copying plaintiffs' works to the
extent necessary to establish entitlement to summary judgment in light
of evidence that it knew that Erlich's use was infringing and had the
ability to prevent its further distribution. While copying all or most
of a work will often preclude fair use, courts have recognized the
fair use defense where the purpose of the use is beneficial to
society, complete copying is necessary given the type of use, the
purpose of the use is completely different than the purpose of the
original, and there is no evidence that the use will significantly
harm the market for the original. This case is distinguishable from
those cases recognizing fair use despite total copying. In Sony, the
home viewers' use was not commercial and the viewers were allowed to
watch the entire shows for free. In Sega v. Accolade, the complete
copying was necessitated to access the unprotectable idea in the
original. Here, plaintiffs never gave either Edich or Netcom
permission to view or copy their works. Netcom's use has some
commercial aspects. Further, Netcom's copying is not for the purpose
of getting to the unprotected idea behind plaintiffs' works. Although
plaintiffs may ultimately lose on their infringement claims if, among
other things, they cannot prove that posting their copyrighted works
will harm the market for these works, see Religious Technology Center
v. Lerma, F. Supp., No. 95-1107-A, slip op. at 10 (E.D. Va. August 30,
1995) (finding fair use defense exists where no separate market for
works because Scientologists cannot effectively use them without the
Church's supervision); Religious Technology Center
v. F.A.C.T.Net. Inc., No. 95-B-2143, slip op. at 11-14
(D. Colo. September 15, 1995) (finding no showing of a potential
effect on the market for plaintiffs' works), fair use presents a
factual question on which plaintiffs have at least raised a genuine
issue of fact. Accordingly, the court does not find that Netcom's use
was fair as a matter of law.

C. Conclusion

The court finds that plaintiffs have raised a genuine issue of fact
regarding whether Netcom should have known that Erlich was infringing
their copyrights after receiving a letter from plaintiffs, whether
Netcom substantially participated in the infringement, and whether
Netcom has a valid fair use defense. Accordingly, Netcom is not
entitled to summary judgment on plaintiffs' claim of contributory
copyright infringement. However, plaintiffs' claims of direct and
vicarious infringement fail.

II. KLEMESRUD'S MOTION FOR JUDGMENT ON THE PLEADINGS

A. Standards for Judgment on the Pleadings

A motion for judgment on the pleadings pursuant to Federal Rule of
Civil Procedure 12(C) is directed at the legal sufficiency of a part's
allegations. A judgment on the pleadings is proper when there are no
issues of material fact, and the moving party is entitled to judgment
as a matter of law. General Conference Corp. v. Seventh Day Adventist
Church, 887 F.2d 228, 230 (9th Cir. 1989), =3D, denied, 493 U.S. 1079
(1990); Hal Roach Studios v. Rich~d Feiner & Co., 896 F.2d 1542, 1550
(9th Cir. 1990). In ruling on a motion for judgment on the pleadings,
district courts must accept all material allegations of fact alleged
in the complaint as true, and resolve all doubts in favor of the
nonmoving party. Id. The court need not accept as true conclusory
allegations or legal characterizations. Western Mining Council
v. Watt, 643 F.2d 618, 624 (9th Cir. 1981). Materials submitted with
the complaint may be considered. Hal Roach Studios, 896 F 2d at
1555. All affirmative defenses must clearly appear on the face of the
complaint. McCalden v. California Library Ass'n, 955 F.2d 1214, 1219
(9th Cir. 1990).

B. Copyright Infringement

1. Direct Infringement

First, plaintiffs allege that Klemesrud directly infringed their
copyrights by "reproduc[ing] and publish[ing] plaintiffs' works. FAC
Paragraph 35. The complaint alleges that "Erlich . . . caused copies
of [plaintiffs' works] to be published, without authorization, on the
BBS computer maintained by Klemesrud" and that "Klemesrud's BBS
computer, after receiving and storing for some period of time the
copies of the Works sent to it from Erlich, created additional copies
of the works and sent these copies to Netcom's computer." FAC
Paragraph 34. The allegations against Klemesrud fail for the same
reason the court found that Netcom was entitled to judgment as a
matter of law on the direct infringement claim. There are no
allegations that Klemesrud took any affirmative steps to cause the
copies to be made. The allegations, in fact, merely say that "Erlich
. . . caused" the copies to be made and that Klemesrud's computer, not
Klemesrud himself, created additional copies. There are no allegations
in the complaint to overcome the missing volitional or causal elements
necessary to hold a BBS operator directly liable for copying that is
automatic and caused by a subscriber. See supra part I.B. I .

2. Contributory Infringement

Second, the complaint alleges that Klemesrud is contributorily
liable. FAC 1135- It further alleges that plaintiffs repeatedly
objected to Klemesrud's actions and informed him that Erlich's (and
his) actions constituted infringement. FAC Paragraph 36. A letter
attached to the complaint indicates that such notice was first sent to
Klemesrud on December 30, 1994. FAC, Ex. I. Despite the warnings,
Klemesrud allegedly refused to assist plaintiffs in compelling Erlich
to stop his postings and refused to stop receiving, copying,
transmitting and publishing the postings. FAC Paragraph 38. To state a
claim for contributory infringement, plaintiffs must allege that
Klemesrud knew or should have known of Erlich's infringing actions at
the time they occurred and yet substantially participated by
"induc[ing], caus[ing] or materially contribut[ing] to the infringing
conduct" of Erlich. Gershwin, 443 F.2d at 1162. For the reasons
discussed in connection with Netcom's motion, the court finds
plaintiffs' pleadings sufficient to raise an issue of contributory
infringement.

3. Vicarious Liability

The third theory of liability argued by plaintiffs, vicarious
liability, is not specifically mentioned in the
complaint. Nonetheless, this theory fails as a matter of law because
there are insufficient factual allegations to support it. Plaintiffs
must show that Klemesrud had the right and ability to control Erlich's
activities and that Klemesrud had a direct financial interest in
Erlich's infringement. Shapiro. Bernstein, 316 F.2d at 306. A letter
from Klemesrud to plaintiffs' counsel states that Klemesrud would
comply with plaintiffs' request to take actions against Erlich by
deleting the infringing postings from his BBS if plaintiffs mailed him
the original copyrighted work and he found that they matched the
allegedly infringing posting. FAC, Ex. J. Plaintiffs argue that this
letter indicates Klemesrud's ability and right to control Erlich's
activities on his BBS. The court finds that this letter, construed in
the light most favorable to plaintiffs, raises a question as to
whether plaintiffs can show that Klemesrud, in the operation of his
BBS, could control Erlich's activities, such as by deleting infringing
postings. However, plaintiffs' failure to allege a financial benefit
is fatal to their claim for vicarious liability.

The complaint alleges that Klemesrud is in the business of operating a
BBS for subscribers for a fee. The complaint does not say how the fee
is collected, but there are no allegations that Klemesrud's fee, or
any other direct financial benefit received by Klemesrud, varies in
any way with the content of Erlich's postings. Nothing in or attached
to the complaint states that Klemesrud in any way profits from
allowing Erlich to infringe copyrights. Plaintiffs are given 30 days
leave in which to amend to cure this pleadings deficiency if they can
do so in good faith.

III. PRELIMINARY INJUNCTION AGAINST NETCOM AND KLEMESRUD

A. Legal Standards for a Preliminary Injunction

A party seeking a preliminary injunction may establish its entitlement
to equitable relief by showing either (1) a combination of probable
success on the merits and the possibility of irreparable injury, or
(2) serious questions as to these matters and the balance of hardships
tipping sharply in the movant's favor. First Brands Corp. v. Fred
Meyer. Inc., 809 F.2d 1378, 1381 (9th Cir. 1987). These two tests are
not separate, but represent a "continuum" of equitable discretion
whereby the greater the relative hardship to the moving party, the
less probability of success need be shown. Regents of University of
California v. American Broadcasting Cos., 747 F.2d 511, 515 (9th
Cir. 1984). The primary purpose of a preliminary injunction is to
preserve the status quo pending a trial on the merits. Los Angeles
Memorial Coliseum Commission v. National Football League, 634 F.2d
1197, 1200 (9th Cir. 1980).

B. Likelihood of Success

The court finds that plaintiffs have not met their burden of showing a
likelihood of success on the merits as to either Netcom or
Klemesrud. The only viable theory of infringement is contributory
infringement, and there is little evidence that Netcom or Klemesrud
knew or should have known that Erlich was engaged in copyright
infringement of plaintiffs' works and was not entitled to a fair use
defense, especially as they did not receive notice of the alleged
infringement until after all but one of the postings were
completed. Further, their participation in the infringement was not
substantial. Accordingly, plaintiffs will not likely prevail on their
claims.

C. Irreparable Injury

The court will presume irreparable harm for the copyright claim where
plaintiffs have shown a likelihood of success on their claims of
infringement. Johnson Controls. Inc. v. Phoenix Control Systems. Inc.,
886 F.2d 1173, 1174 (9th Cir. 1989). Here, however, plaintiffs have
not made an adequate showing of likelihood of success. More
importantly, plaintiffs have not shown that the current preliminary
injunction prohibiting Erlich from infringing plaintiffs' copyrights
will not be sufficient to avoid any harm to plaintiffs' intellectual
property rights.

D. First Amendment Concerns

There is a strong presumption against any injunction that could act as
a "prior restraint" on free speech, citing CBS. Inc. v. Davis, 114
S. Ct. 912, 913-14 (1994) (Justice Blackmun, as Circuit Justice,
staying a preliminary injunction prohibiting CBS from airing footage
of inside of meat packing plant). Because plaintiffs seek injunctive
relief that is broader than necessary to prevent Erlich from
committing copyright infringement, there is a valid First Amendment
question raised here. Netcom and Klemesrud play a vital role in the
speech of their users. Requiring them to prescreen postings for
possible infringement would chill their users' speech. z In re Capital
Cities/ABC. Inc, 918 F.2d at 144.

E. Conclusion

Plaintiffs have not shown a likelihood of success on the merits of
their copyright claims nor irreparable harm absent an injunction
against defendants Netcom and Klemesrud. Accordingly, plaintiffs are
not entitled to a preliminary injunction.

IV. ORDER

The court denies Netcom's motion for summary judgment and Klemesrud's
motion for judgment on the pleadings, as a triable issue of fact
exists on the claim of contributory infringement. The court also gives
plaintiffs 30 days leave in which to amend to state a claim for
vicarious liability against defendant Klemesrud, if they can do so in
good faith. Plaintiffs' application for a preliminary injunction
against defendants Netcom and Klemesrud is denied.

The parties shall appear for a case management conference at 10:30
a.m. on Friday, January 1-9, 1996. The deadline for completing
required disclosures is January 5, 1996. The joint case management
conference statement must be filed by January 12, 1996.

DATED: 11/21/95

/s/ RONALD M. WHYTE

United States District Judge

- - - - - - FOOTNOTES - - - - - -

1 Cyberspace is a popular term for the world of electronic
communications over computer networks. See Trotter Hardy, The Proper
Legal Regime for "Cyberspace, " 55 U. Pitt. L. REV. 993, 994 (1994).

2 "The Internet today is a worldwide entity whose nature cannot be
easily or simply defined. From a technical definition, the Internet is
the 'set of all interconnected IP networks'-the collection of several
thousand local, regional, and global computer networks interconnected
in real time via the TCP/IP Internetworking Protocol suite." Daniel
P. Dern, The Internet Guide for New Users 16 (1994). One article
described the Internet as a collection of thousands of local,
regional, and global Internet Protocol networks. What it means in
practical terms is that millions of computers in schools,
universities, corporations, and other organizations are tied together
via telephone lines. The Internet enables users to share files, search
for information, send electronic mail, and log onto remote
computers. But it isn't a program or even a particular computer
resource. It remains only a means to link computer users together.

Unlike on-line computer services such as CompuServe and America On
Line, no one runs the Internet....

No one pays for the Internet because the network itself doesn't exist
as a separate entity. Instead various universities and organizations
pay for the dedicated lines linking their computers. Individual users
may pay an Internet provider for access to the Internet via its
server.

David Bruning, Along the InfoBahn, ASTRONOMY, Vol. 23, No. 6, p. 76
(June 1995).

3 Issues of Erlich's liability were addressed in this court's order of
September 22, 1995. That order concludes in part that a preliminary
injunction against Erlich is warranted because plaintiffs have shown a
likelihood of success on their copyright infringement claims against
him. Plaintiffs likely own valid copyrights in Hubbard's published and
unpublished works and Erlich's near-verbatim copying of substantial
portions of plaintiffs' works was not likely a fair use. To the extent
that Netcom and Klemesrud argue that plaintiffs' copyrights are
invalid and that Netcom and Klemesrud are not liable because Erlich
had a valid fair use defense, the court previously rejected these
arguments and will not reconsider them here.

4 The Usenet has been described as a worldwide community of electronic
BBSs that is closely associated with the Internet and with the
Internet community. Paragraph The messages in Usenet are organized
into thousands of topical groups, or "Newsgroups" .... Paragraph As a
Usenet user, you read and contribute ("post") to your local Usenet
site. Each Usenet site distributes its users' postings to other Usenet
sites based on various implicit and explicit configuration settings,
and in turn receives postings from other sites. Usenet traffic
typically consists of as much as 30 to 50 Mbytes of messages per
day. Paragraph Usenet is read and contributed to on a daily basis by a
total population of millions of people.... Paragraph There is no
specific network that is the Usenet. Usenet traffic flows over a wide
range of networks, including the Internet and dial-up phone links.

Dern, supra, at 196-97.

5 The First Amended Complaint ("FAC") contains three claims: (1)
copyright infringement of BPI'S published literary works against all
defendants; (2) copyright infringement of RTC's unpublished
confidential works against all defendants; and (3) misappropriation of
RTC'S trade secrets against defendant Erlich only.

6 Klemesrud alternatively filed a motion for summary judgment, which
will not be considered at this struck those portions of the motion
that referred to matters outside of the pleadings.

7 In this context, "copying" is "shorthand for the infringement of any
of the copyright owner's five exclusive rights." S.O.S.,
Inc. v. Payday, Inc., 886 F.2d 1081, 1085 n.3 (9th Cir. 1989).

8 The court has under submission plaintiffs' request to expand the
preliminary injunction against Erlich.

9 Plaintiffs have argued at times during this litigation that Netcom
should only be required to respond after being given notice, which is
only relevant to contributory infringement. Nevertheless, the court
will address all three theories of infringement liability.

10 The strict liability for copyright infringement is in contrast to
another area of liability affecting online service providers:
defamation. Recent decisions have held that where a BBS exercised
little control over the content of the material on its service, it was
more like a "distributor" than a "republisher" and was thus only
liable for defamation on its system where it knew or should have known
of the defamatory statements. Cubby,Inc. v. CompuServe. Inc., 776
F. Supp. 135 (S.D.N.Y. 1991). By s contrast, a New York state court
judge found that Prodigy was a publisher because it held itself out to
be controlling the content of its services and because it used
software to automatically prescreen messages that were offensive or in
bad taste. Stratton Oakmont, Inc, v. Prodigy Services Co., THE
RECORDER, June 1, 1995, at 7 (excerpting May 24, 1995 Order Granting
Partial Summary Judgment to Plaintiffs).

11 One commentator addressed the difficulty in translating copyright
concepts, including the public/private dichotomy, to the digitized
environment. See Niva Elkin-Koren, Copyright Law and Social Dialogue
on the Information Superhighway: The Case Against Copyright Liability
of Bulletin Board Operators, 13 CARDOZO ARTS & ENT. L.J. 346, 390
(1993). This commentator noted that one way to characterize a BBS
operation is that it "provides subscribers with access and
services. AS such, BBS operators do not create copies, and do not
transfer them in any way. Users post the copies on the BBS, which
other users can then read or download." Id at 356.

12 Netcom compares itself to a common carrier that merely acts as a
passive conduit for information. In a sense, a Usenet server that
forwards all messages acts like a common carrier, passively
retransmitting every message that gets sent through it. Netcom would
seem no more liable than the phone company for carrying an infringing
facsimile transmission or storing an infringing audio recording on its
voice mail. AS Netcom's counsel argued, holding such a server liable
would be like holding the owner of the highway, or at least the
operator of a toll booth, liable for the criminal activities that
occur on its roads. Since other similar carriers of information are
not liable for infringement, there is some basis for exempting
Internet access providers from liability for infringement by their
users. The IITF Report concluded that "[i]f an entity provided only
the wires and conduits-such as the telephone company, it would have a
good argument for an exemption if it was truly in the same position as
a common carrier and could not control who or what was on its system."
IITF Report at 122. Here, perhaps, the analogy is not completely
appropriate as Netcom does more than just "provide the wire and
conduits." Further, Internet providers are not natural monopolies that
are bound to carry all the traffic that one wishes to pass through
them, as with the usual common carrier. a - at 122 n.392 (citing
Federal Communications Commission v. MidwestVideo Corp., 440 U.S. 689,
701 (1979)). Section 111 of the Copyright Act codifies the exemption
for passive carriers who are otherwise liable for a secondary
transmission. 3 Melville B. Nimmer & David Nimmer, Nimmer on Copyright
Section 12.04[B][3], at 12-99 (1995). However, the carrier must not
have any direct or indirect control over the content or selection of
the primary transmission. Id; 17 U.S.C. Section 111(a)(3). Cf, infra,
part I.B.3.a. In any event, common carriers are granted statutory
exemptions for liability that might otherwise exist. Here, Netcom does
not fall under this statutory exemption, and thus faces the usual
strict liability scheme that exists for copyright. Whether a new
exemption should be carved out for online service providers is to be
resolved by Congress, not the courts. Compare Comment, "Online Service
Providers and Copyright Law: The Need for Change," I SYRACUSE
J. LEGIS. & POL'Y 197, 202 (1 995) (citing recommendations of online
service providers for amending the Copyright Act to create Liability
only where a "provider has 'actual knowledge that a work that is being
or has been transmitted onto, or stored on, its system is infringing,'
and has the 'ability and authority' to stop the transmission, and has,
after a reasonable amount of time, allowed the infringing activity to
continue'") with IITF Report at 122 (recommending that Congress not
exempt service providers from strict liability for direct
infringements).

13 The court notes, however, that stopping the distribution of
information once it is on the Internet is not easy The decentralized
network was designed so that if one link in the chain be closed off,
the information will be dynamically rerouted through another
link. This was meant to allow the system to be used for communication
after a catastrophic event that shuts down part of it. Francis
Decl. Paragraph 4.

14 The paragraph in Playboy containing the quotation begins with a
description of the right of public distribution. Id Further, the above
quoted language is followed by a citation to a discussion of the right
of public distribution in Jay Dratler, Jr., INTELLECTUAL PROPERTY LAW:
COMMERCIAL, CREATIVE AND INDUSTRIAL PROPERTY Section 6.01[3], at 6-15
(1991). This treatise states that "the distribution right may be
decisive, if, for example, a distributor supplies products containing
unauthorized copies of a copyrighted work but has not made the copies
itself." Id. (citing to Williams Electronics, Inc. v. Arctic
International, Inc., 685 F.2d 870, 876 (3d Cir. 1982)). In any event,
the Williams holding regarding public distribution was dicta, as the
court found that the defendant had also made copies. Id.

15 Given the ambiguity in plaintiffs' reference to a violation of the
right to 'publish" and to Playboy, it is possible that plaintiffs are
also claiming that Netcom infringed their exclusive right to publicly
distribute their works. The court will address this argument infra.

16 The court further notes that Playboy has been much criticized. See,
e.g., L. Rose, NETLAW 91-92 (1995). The finding of direct infringement
was perhaps influenced by the fact that there was some evidence that
defendants in fact knew of the infringing nature of the works, which
were digitized photographs labeled "Playboy" and "Playmate."

17 To the extent that Sega holds that BBS operators are directly
liable for copyright infringement when users upload infringing works
to their systems, this court respectfully disagrees with the court's
holding for the reasons discussed above. Further, such a holding was
dicta, as there was evidence that the supporting the contributory
infringement theory. Id. at 683.

18 References to "Tr." are to the reporter's transcript of the June
23, 1995 hearing on these motions.

19 Despite that uncertainty, the IITF Report recommends a strict
liability paradigm for BBS operators See IITF Report at 122-24. It
recommends that Congress not exempt on-line service providers from
strict liability because this would prematurely deprive the system of
an incentive to get providers to reduce the damage to copyright
holders by reducing the chances that users will infringe by educating
them, requiring indemnification, purchasing insurance, and, where
efficient, developing technological solutions to screening out
infringement. Denying strict liability in many cases would leave
copyright owners without an adequate remedy since direct infringers
may act anonymously or pseudonymously or may not have the resources to
pay a judgment. Id.; see also Hardy, supra.

20 Adopting such a rule would relieve a BBS of liability for failing
to take steps to remove infringing works from its system even after
being handed a court's order finding infringement. This would be
undesirable and is inconsistent with Netcom's counsel's admission that
Netcom would have an obligation to act in such
circumstances. Tr. 35:25; see also Tr. 42:18-42:20.

21 The court does not see the relevance of plaintiffs' argument that
Netcom's failure to investigate their claims of infringement or take
actions against Erlich was a departure from Netcom's normal
procedure. A policy and practice of acting to stop postings where
there is inadequate knowledge of infringement in no way creates a
higher standard of care under the Copyright Act as to subsequent
claims of user infringement.

22 In this case, Netcom is even further removed from Erlich's
activities. Erlich was in a contractual relationship only with
Klemesrud. Netcom thus dealt directly only with Klemesrud. However, it
is not crucial that Erlich does not obtain access directly through
Netcom. The issue is Netcom's right and ability to control the use of
its system, which it can do indirectly by controlling Klemesrud's use.

23 However, plaintiffs submit no evidence indicating Netcom, or
anyone, could design software that could determine whether a posting
is infringing.

24 For example, plaintiffs' demand that the court order Netcom to
terminate Klemesrud's BBS's access to the Internet, thus depriving all
500 of his subscribers, would be overbroad, as it would unnecessarily
keep hundreds of users, against whom there are no allegations of
copyright infringement, from accessing a means of speech. The
overbroadness is even more evident if, as plaintiffs contend, there is
a way to restrict only Erlich's access to a.r.s.

25 Netcom additionally argues that plaintiffs' theory of liability
would have a chilling effect on users, who would be liable for merely
browsing infringing works. Browsing technically causes an infringing
copy of the digital information to be made in the screen memory. MAI
holds that such a copy is fixed even when information is temporarily
placed in RAM, such as the screen RAM. The temporary copying involved
in browsing is only necessary because humans cannot otherwise perceive
digital information. It is the functional equivalent of reading, which
does not implicate the copyright laws and may be done by anyone in a
library without the permission of the copyright owner. However, it can
be argued that the effects of digital browsing are different because
millions can browse a single copy of a work in r cyberspace, while
only one can read a library's copy at a time.

Absent a commercial or profit-depriving use, digital browsing is
probably a fair use; there could hardly be a market for licensing the
temporary copying of digital works onto computer screens to allow
browsing. Unless such a use is commercial, such as where someone reads
a copyrighted work online and therefore decides not to purchase a copy
from the copyright owner, fair use is likely. Until reading a work
online becomes as easy and convenient as reading a paperback,
copyright owners do not have c much to fear from digital browsing and
there will not likely be much market effect.

Additionally, unless a user has reason to know, such as from the title
of a message, that the message contains copyrighted materials, the
browser will be protected by the innocent infringer doctrine, which
allows the court to award no damages in appropriate circumstances. In
any event, users should hardly worry about a finding of direct
infringement; it seems highly unlikely from a practical matter that a
copyright owner could prove such infringement or would want to sue
such an individual.

26 A recent report noted that a third aspect of the nature of the work
may be relevant: whether it is in digital or analog form. IITF Report
at 78. Although the copyright laws were developed before digital works
existed, they have certainly evolved to include such works, and this
court can see no reason why works should deserve less protection
because they are in digital form, especially were, as here, they were
not put in such form by plaintiffs.

[Stanton McCandlish]

The related decisions from Judge Brinkema's court are available at
http://www.eff.org/pub/Censorship/Scientology_cases/

--
<HTML><A HREF="http://www.eff.org/~mech/"> Stanton McCandlish
</A><HR><A HREF="mailto:me...@eff.org"> me...@eff.org
</A><P><A HREF="http://www.eff.org/"> Electronic Frontier Foundation
</A><P><A HREF="http://www.eff.org/A/"> Online Activist </A></HTML>