It's an American success story. Three young men, working out of a tiny office in Northern California, created an innovative online technology in February 2005, and it took the world by storm. In less than two years, their creation–YouTube–became one of the most prominent and popular Web sites on the Internet. And YouTube's owners garnered themselves a $1.65 billion payday when they recently sold the company to Google.

According to one prominent copyright owner, however, YouTube's success is the result of massive theft. Viacom–the New York-based media giant whose subsidiaries include Comedy Central, Paramount Pictures and Country Music Television–has claimed that many people flock to YouTube to watch pirated copies of Viacom's movies and TV shows. And Viacom has decided to do something about this rampant piracy.

On March 13, it filed a copyright infringement suit against YouTube and its corporate parent, Google. The suit alleges that users posted more than 150,000 unauthorized clips of Viacom programs on YouTube and that those programs were viewed 1.5 billion times. Viacom is seeking at least $1 billion in damages and an injunction that forces YouTube to employ technology to stop or limit future infringements.

The case has broad ramifications for both copyright owners and Internet firms. If YouTube wins, it will imperil the rights of copyright owners to control and profit from the online distribution of their works.

If YouTube loses, however, it will jeopardize the ability of companies to provide innovative new ways of delivering content online.

“[T]his would cast a chilling effect on the ability of Internet businesses to create new forms for delivering content,” says Lawrence Iser, partner at Kinsella Weitzman Iser Kump & Aldisert. “The ultimate losers would be people who want to forge ahead technologically without being sued by the large content companies.”

DMCA Shortcomings

This dispute between copyright owners and Internet companies was supposed to have been resolved years ago. The 1998 Digital Millennium Copyright Act created a special safe-harbor rule that protects online companies from being sued for infringement, provided they meet certain ?? 1/2 requirements such as promptly responding to authorized takedown notices from copyright owners. This allows Internet companies to operate without having to pre-screen all the material their users send over the Internet.

In return, the DMCA gives something to copyright owners: the ability to quickly remove infringing postings. Instead of going to court and obtaining an order that a particular online photo or music file is infringing, a copyright owner can simply send a takedown letter to the Internet provider, and the provider is required to promptly remove the supposedly infringing material.

“The DMCA is a compromise,” says Lawrence Lessig, who teaches copyright law at Stanford. “One side gets an expedited process for getting stuff taken down. The other side gets immunity if it is following the DMCA procedures.”

According to many experts, Viacom's lawsuit seeks to throw out this legislative compromise. “It is a case of first impression–a direct attack on the viability of the safe harbor rule of the DMCA,” Iser says.

“Viacom seems to be saying, 'We don't like the compromise that the DMCA has set out, and we want to go around the law,'” says Wendy Seltzer, a fellow at Harvard Law School's Berkman Center for Internet and Society–a research program that explores cyberspace issues.

Viacom's Stance

There's some ambiguity about whether the DMCA's safe harbor applies to innovative companies such as YouTube. When Congress drafted the statute in 1998, it focused on the types of companies then doing business online. The statute's safe harbor thus explicitly covers four Internet functions: Web hosting, system caching, information location services (e.g., search engines) and online communications (such as e-mail services).

New online services, such as YouTube or MySpace, don't fit easily into any of these four pigeonholes. “It isn't completely crazy to say [YouTube is] a specific type of service that Congress wasn't contemplating,” says Julie Cohen, who teaches copyright law at Georgetown University.

And that's what Viacom intends to argue. The company takes the position that YouTube isn't covered by the safe harbor because it applies only to ISPs.

Many experts, however, take issue with this narrow reading of the statute. They argue that even if the statute's language may not cover technological developments, Congress' intent is clear.

“[T]he legislative history contained some fairly clear statements that Congress wanted online services to develop with substantial certainty,” Cohen says. “Congress was trying to create a clear and predictable rule for [these] services ?? 1/2 and I think that ultimately has to prevail.”

Even if the safe harbor does apply to YouTube, its protections are not absolute. For instance, the statute provides that the safe-harbor protections are lost if a company has “actual knowledge” of infringing material on its Web site. Viacom claims YouTube knows there are infringing videos on its site, and so it cannot avoid liability under the safe harbor.

Many, however, believe this interpretation of the DMCA is too harsh.

“The appropriate interpretation of the DMCA is that you must have specific knowledge of infringing material, not just general knowledge that some material is infringing,” Iser says. “This will be the first major case interpreting this provision.”

Judicial Sympathy

Viacom is fighting an uphill legal battle, according to many copyright experts. “YouTube has a solid case,” Seltzer says. “Nothing that YouTube does puts it outside the safe harbor.”

Viacom, however, has filed suit in the 2nd Circuit, and those judges may be unusually sympathetic to the company's arguments. “There have been a series of cases in the 2nd Circuit where judges have not been willing to give innovative online services much latitude,” Cohen says. “They have been quite sympathetic to the interests of copyright owners. ?? 1/2 I don't think it is an open and shut case.”

If Viacom wins, it would not be an unalloyed victory for the major music, movie and TV companies. Many of those companies see YouTube as a way to advertise their works for free. That's why some companies–including CBS, BBC, NBA and The Sundance Channel–have partnered with YouTube to allow users to view their content on the site.

It's thus unclear how much a Viacom victory in court would help content companies' bottom lines. Such a result, however, would be a major blow to online innovation, some experts argue.

“It would thwart progress on ways to display content on the Internet,” Iser says. “People would be afraid to go forward ?? 1/2 for fear of being sued.”

YouTube would probably survive a loss. Backed by Google's deep pockets, the company could pay for licensing deals with Viacom and other content companies. The real losers would be small startups with new ideas for delivering content online. “Having to negotiate with every sort of copyright claimant before you set up a competing service is prohibitive for newcomers,” Seltzer says.