Winning But Losing: Lessons From An Internet StartUp
from the the-deck-is-stacked dept
“Justice prevails” is often declared when a court case ends, honoring a system that produces the right result. Right, however, is not always just. The judicial system needs to address the exorbitant costs that accompany litigation, or a situation can happen when a company is sued by a deeper pocket plaintiff, wins the case, but has to shut down because the cost of litigation has exhausted its financial capital.
Last month, in a unanimous decision, the Ninth Circuit affirmed, once again, a judgment in favor of Veoh Networks in a widely followed copyright case brought six years ago by Universal Music Group. Veoh, the court held, was entitled to rely on the safe harbors of the Digital Millennium Copyright Act, and was not liable for copyright infringement for user-uploaded videos that Universal alleged contained their copyrights, an important precedent that benefits YouTube and others. Veoh, the company I joined during the early stages of the digital video revolution in 2006, which pioneered long form viewing on user generated content sites, and was the first site to offer premium content from major networks like ABC and CBS, is not around anymore to capitalize on its victory. Three years ago, a few months after Veoh’s win at the district court, its leadership surveyed the war torn company, wounded from a litigation battle designed to inflict the very damage the lawsuit had wrought, wondered, at what price victory and decided to sell the assets and closed the doors. Universal Music lost the case, but achieved victory, shutting down an innovative company that threatened their static business model.
From the outset of the case, Universal Music Group made sure Veoh would suffer financially. They issued many discovery requests, doing their best to make sure Veoh spent money to defend itself. Savvy plaintiffs know how to exert pressure by exploiting our judicial system’s liberal rules regarding discovery. In this regard, advances in technology have not produced economic efficiencies. Millions of documents and casual conversations are stored on computers, readily accessible. These petabytes of data need to be prepared and reviewed by lawyers before being produced in response to a discovery request. The lawyers’ bill increases very rapidly when an army of attorneys is reviewing all this data. Because the bulk of documents and discovery often lie with the defendant, plaintiffs can inflict maximum financial pain on a defendant, while producing relatively few documents themselves. This tilted playing field gives plaintiffs an unfair advantage. In the Veoh case, legal fees on discovery alone were enormous, exacerbated by the magistrate’s decisions to compel the company at its own cost to store every single video on our system, and to even produce Skype conversations. Who suffers? The defendant. Recourse? None.
The company quickly recognized the economics of litigation and the lack of upside to being a defendant and offered to settle. However, Veoh never had meaningful settlement discussions; Veoh did not have the cash to pay the amount Universal was seeking. The company was left with no choice but to litigate, and spend money.
To counter the ticking clock and register, Veoh hoped for a quick resolution to lift the dark cloud Universal had placed on the company that handcuffed it from raising the additional funds the company needed to grow. The case, however, was not resolved in the district court for over two years and is now approaching the six-year anniversary.
Defendants need an option other than to just play defense and wait. It was well documented in the case that Universal never even sent Veoh any takedown notice for their content and was similarly undisputed that every time Veoh received a takedown notice from every other content owner, that Veoh took the content down. Universal could have achieved its goal of having its alleged content removed from Veoh’s website by merely sending the company a letter. Our judicial system gave Universal the right to sue. Shouldn’t Veoh have any rights or recourse, especially when a mere letter could have avoided an entire litigation?
Unfortunately, the only option available to Veoh was to file a motion to recover fees after it won the case, even though this avenue was too little too late; the mortal damage was already inflicted. Six years of combative litigation cannot be undone entirely by recovering legal fees. Yet, the standard for recovering fees is very high and Veoh was not successful. Despite its favorable decision on the merits of the case, the Ninth Circuit denied awarding Veoh its fees, instead remanding to the District Court to consider awarding Veoh its much lower court costs. The Ninth Circuit’s ruling on this point only further weakens an already poor option for innocent companies.
Our judicial system needs a solution to rectify the devastation that unfounded litigation causes companies ultimately proven innocent. Courts need to be sensitive to the new entrant and pay respect to the scales of justice when a deep pocket plaintiff goes after a financially weaker opponent. Instituting “loser pays” into the concept of commercial litigation in appropriate situations improves the chances for defendants, and could reduce meritless litigation. While this concept has been debated for decades, another standard needs to be introduced, one that holds plaintiffs and their lawyers equally accountable. Plaintiffs’ lawyers should be compelled to pay any ‘loser pays’ fee along with their clients. In a world where plaintiffs’ lawyers share in multi-billion dollar settlements, it seems only fair that if they lose a case they should pay. This will force lawyers to think twice about the merits of their clients’ case, as opposed to what strong-armed litigation tactic they can use to extract a settlement. If lawyers are held accountable for their – and their client’s – actions in a manner never before applied, we will see what everyone wants: a precipitous drop in the number of cases in our judicial system. We can even adopt a three strikes policy and ban law firms and their clients for twelve months if they are found guilty of such abusive behavior on more than two occasions. How refreshing that would be.
Fewer litigations will reduce the dockets of federal and state courts, reducing the need for our government to increase the number of judges and court staff, thereby saving taxpayers’ money. Plaintiffs will pay more attention to increasing defendant’s legal fees lest they lose. Legal fees and costs will decline, which will lead to a downward pressure on insurance premiums. Most importantly, productivity will increase. Companies will spend previously allocated monies to litigation on research, development, hiring, and expansion of operations.
Veoh encountered a plaintiff set on its destruction. They were unable to defeat Veoh in the world of technology or in the world of business. With those avenues closed, Universal sued. The judicial system provided Universal with what it could not achieve on a level business playing field. Veoh won the case but is not around to continue to grow. That is wrong. UMG and its lawyers should be required to pay for the damage they have done. Strike one to a plaintiff and its lawyers. Fairness in our judicial systems dictates such an outcome.
Joshua Metzger is an Internet consultant. He was SVP Corporate Development & General Counsel for Veoh Network and before that was chief legal officer for Overture Services, which was acquired by Yahoo!.