The Journal of The DuPage County Bar Association

Back Issues > Vol. 16 (2003-04)

Can Music Pirates Abandon Ship And Leave Insurers Holding The Bag?
By Richard Hodyl, Jr. and Kevin M. Gard

Now that the recording industry has begun to wage war on file sharers, often referred to as "music pirates", observers are waiting to see what the ultimate outcome of this battle will be. In its first barrage of lawsuits, members of the Recording Industry Association of America (the "music industry") filed 341 federal civil lawsuits seeking to stop the alleged illegal downloading and further distribution of copyrighted music from peer-to-peer networks. Based on news reports, the music industry’s lawsuits have made their mark and have caused major concerns among those targeted in the lawsuits as well as those who believe they will be future targets. As a result, many file sharers are evaluating what course of action to take to minimize their risk of financial exposure.

The monetary damages the music industry will seek to recover from music pirates may be significant. Persons targeted in the music industry lawsuits have a real risk of having a large monetary judgment entered against them. Because of the amount of money potentially at risk, two issues have to be addressed: (1) who is going to pay for the settlements and judgments; and (2) who will pay for the lawyers to defend these lawsuits?

Many of the alleged music pirates are evaluating the music industry’s threats, and so too may be the parents of minors that used their parents’ computer to download copyrighted music from peer-to-peer networks. Can parents be held personally liable for their child’s illegal downloading activity? Will it make any difference whether a parent knew about their child’s file sharing? To what extent does the parent’s knowledge of the child’s activity have in determining liability? These are important yet unanswered questions. To date there has been little discussion about who will ultimately pay for such wrongdoings.

Another important issue to be addressed is whether music pirates can look to their insurance companies to provide relief from the music industry’s demands. Is it possible that insurance companies may ultimately pay the costs to defend a copyright infringement lawsuit and for settlements or judgments? Under certain circumstances, the answer is yes.

I. The Music Industry’s Plan.

The Recording Industry Association of America ("RIAA") has invested substantial time and resources to educate the public that the unauthorized downloading of music from the Internet is illegal. According to the RIAA, more than 2.6 billion copyrighted files (mostly songs) are downloaded every month. The RIAA’s Herculean effort seems to have fallen on the deaf ears of countless people that have ignored the music industry’s warnings. At least one reported study suggests that more people have blatantly ignored the RIAA’s public information campaign than the number of people that truly knew nothing about it. The fact that the music industry has made catalogues of music available to dozens of new high-quality, low-cost, online services has also done little to deter many from downloading music on peer-to-peer networks. These efforts apparently have failed to stem the tide of file sharing on the Internet. The music industry continues to experience a downward spiral in revenues from legitimate music sales (estimated to be as high as $4.2 billion per year). As a result, the music industry has changed course and resorted to a far more aggressive strategy. Under this new strategy, the music industry now will: (1) continue its public education program, (2) offer the alleged music pirates a "clean slate" amnesty program, and (3) file federal civil lawsuits against recalcitrant offenders.

RIAA members have sent a warning letter to each targeted file sharer before a lawsuit is filed. This warning letter identifies the music industry’s claim and affords the recipient the opportunity to provide a response. The warning letter encourages the recipient to consider settlement. These warning letters, combined with the publicity the music industry has generated on the issue, are designed to create fear among file sharers that they may be sued and have to pay stiff civil penalties. The RIAA reports that file sharers can expect a "weekly rollout" of additional lawsuits. Initial reports seem to indicate that the fear factor is taking hold. Approximately 50 defendants sued in the first round of 261 lawsuits have already opted to settle.

II. Amnesty: A Good Deal For Pirates Or A Great Deal For The Music Industry?

For the time being, most people accused of committing music piracy can avoid walking the plank and being sued by the music industry. According to the RIAA, the music industry is willing to grant "amnesty" under their "clean slate" program to peer-to-peer users who voluntarily agree to delete all unauthorized copyrighted musical works and pledge to stop illegally sharing music on the Internet. Many people will likely choose the amnesty option because it gives a file sharer an opportunity to escape serious legal action and potentially substantial legal costs by simply promising never to do it again. The RIAA has reported that more than 1,000 people have already taken advantage of this program.

For any person that does not succumb to the pressure to voluntarily opt for the amnesty option, the risk of being sued by the music industry is real. RIAA member companies to date have filed copyright infringement claims against 341 individual file sharers and have threatened to file many more. The targets of these lawsuits are persons the RIAA describe as "major offenders". According to the RIAA, a "major offender" is someone who distributed roughly 1,000 or more copyrighted music files.

The threat of being sued and having to pay top dollar for intellectual property lawyers, plus the added threat of having to pay substantial fines and penalties, will add to the attractiveness of the amnesty option in the eyes of a targeted offender. The law provides that anyone found liable of copyright infringement may be liable for actual damages, lost profits, or statutory damages up to $150,000 per infringement, plus attorney’s fees and costs. In an attempt to capitalize on targeted individuals’ fears, the music industry has opened a small porthole that will allow many pirates to escape liability by paying a "settlement" to the music industry. According to reports, a settling pirate will likely be asked to pay the music industry between $1,500 - $3,000 to settle, although some settlements have been reported to be in the $15,000 range.

To many the amnesty option will be the only option, especially when they learn how expensive a battle with music industry could be. Many people simply have no interest in fighting music industry giants in court over the right to download their favorite song from the Internet. By providing file sharers with a chance to make the entire issue disappear by simply promising never to do it again, the music industry is betting that most will take the deal. For many, waging a legal battle against the music industry will not be worth their time or the expense.

While the amnesty option may be perceived by some file sharers to be a good deal, it truly is a fantastic deal for the music industry. First, the music industry should expect to see their profits rise because computer literate music enthusiasts will be forced to head back to music stores to buy their favorite music at retail prices. Second, the music industry stands to make money from the settlement dollars paid by anyone willing to settle. Third, the music industry will not risk spending its own money to sue targeted offenders that may not have any money to pay a judgment. If music pirates don’t have enough cash to purchase CD’s, they probably don’t have enough money to pay for a judgment either. Suing people who don’t have any money is generally a bad litigation strategy. Finally, the possibility that many file sharers are minors raises serious issues for the music industry.

With regard to the issue of minors, the music industry knows that it is a safe bet that a little intimidation should be sufficient to force most parents into settlement if they are faced the threat of being sued in federal court because their son or daughter downloaded music off the Internet. Chances are that most parents would rather delete music from their computer and sign off that their child will not download music again than take on billion dollar corporations and their legions of lawyers in court.

The amnesty program is not without its critics. In a recent pending suit in California, some legal experts have warned that music industry’s amnesty program may not be such a great deal after all. These legal scholars have asserted that the amnesty program may potentially create more problems for a settling party than it may be worth because it: (1) requires participants to incriminate themselves, (2) provides the RIAA and others with actionable admissions of wrongdoing under penalty of perjury, (3) does not require the RIAA to destroy data; and (4) does not include any guarantee that the settling party can’t be sued by other music companies in other lawsuits.

III. Insurance Coverage For File Sharing?

One issue that has yet to make it onto most people’s radar screen is whether a targeted file sharer can file an insurance claim for the music industry’s action. Is there insurance coverage for a file sharer’s settlement with the music industry? Is there insurance coverage for a judgment against a file sharer? Will the insurance coverage include payment of legal fees to defend a music industry lawsuit? Is there insurance coverage for illegal music downloads in the first place? The short answer to all of these questions is maybe.

Whether there is or is not insurance coverage for the music industry’s claims depends on the type of policy a person has and the specific terms and conditions in that policy. Insurance policies are individual contracts and they are not "one size fits all". Different policies have different terms and conditions. There is no one "standard" insurance policy. In today’s insurance marketplace, there may be as many different insurance policies as there are songs that were downloaded by file sharers in peer-to-peer groups. Needless to say, file sharers should review their own policies or seek the advice of a lawyer who has insurance coverage experience to assist them to review their policies.

Many file sharers have probably never thought about filing a claim under any of their insurance policies. This is probably because most people think that insurance is available only when they die, when they get into a car accident, or when their house is damaged by wind, flood or hail. Many insurers probably have given little thought to whether these types of claims would be covered and many probably assume that coverage does not exist. Such assumptions by both the file sharer and the insurer may be misplaced. Liability insurance policies typically afford very broad coverage for a wide range of claims. Under certain circumstances, and under certain insurance policies, music pirates may have insurance for their hijinks on the Internet’s open seas.

A recorded song is generally considered to be the property of the author, (i.e. songwriter), or his assignee, the record company. In the United States, songwriters have protection for songs they have written or composed through what is commonly referred to as a copyright. A copyright provides the songwriter with exclusive rights to display, distribute, reproduce, make adaptations and perform the copyrighted work. The law protects the artist in generally the same manner that the law protects the rest of society when a car, jewelry or other valuable personal property is stolen. When music is taken without the owner’s permission, the law provides civil penalties for such unpermitted use. As discussed above, the penalties for copyright violations can be severe.

There are many types of insurance policies that provide coverage for copyright violations. Some examples of the types of insurance policies that may provide copyright infringement coverage include:

· general liability insurance;

· directors’ and officers’ liability insurance;

· umbrella liability insurance;

· excess liability insurance; and

· intellectual property-specific policies.

From a historical standpoint, many insurance companies issued a business insurance policy dating back to the early to mid 1970’s which was called the Comprehensive General Liability Insurance (CGL) policy and which was often referred to as "revolutionary" in the insurance business. This policy was touted as providing the broadest coverage ever available up to that point in time. One of the coverages afforded under this new and revolutionary policy was called "advertising injury" coverage. Advertising injury coverage specifically provided coverage for copyright infringements. Initially, advertising injury coverage was not part of the main policy but could be purchased separately as add-on type coverage. Advertising injury coverage is typically included now in most general liability policies and nearly always includes some type of coverage for copyright infringement claims.

The mere allegation that a person misappropriated copyrighted material does not automatically provide advertising injury coverage. Many insurance policies provide that coverage exists only when the misappropriation of copyrighted materials be done in some way related to the advertising activities of a person’s business or services. This limitation on coverage is commonly referred to as a "course of advertising" requirement. Where a course of advertising requirement is part of a policy, a person who owns a disc jockey business may have coverage if they downloaded music for use in their "DJ" business. Similarly, if a person owns a coffee house and plays illegally downloaded music to develop the ambiance of that business, coverage may be available. If downloaded music is used in a dance club, there may be coverage. Also, use of downloaded music by a bar owner or employee in a bar may also be covered. A company that reproduces audio for customers may have coverage if the copied materials violate copyrights. There are numerous scenarios where small "mom and pop" type businesses may have coverage in the music industry’s attack.

Just because a file sharer does not have their own insurance policy does not necessarily mean there will be no coverage. It is possible coverage may be available under someone else’s policy. Employees of a company, as well as people that work with certain businesses, may be entitled to coverage through the company’s business insurance. It is common for businesses to add individuals to their insurance policies. In certain business dealings, it is often required.

One example where an individual can be covered on someone else’s policy is where a person is a company director or officer. Professional liability insurance policies cover "wrongful acts" committed by a company’s directors and officers. How a policy defines the phrase "wrongful act" can mean the difference between having coverage and not having coverage. If a policy defines "wrongful act" broadly, or is defined in confusing and ambiguous language, it may provide coverage for copyright violations. Courts typically interpret poorly worded or ambiguous policy language in favor of the person seeking coverage and against the insurance company.

IV. Coverage For The "Average Joe".

Is insurance coverage for the music industry lawsuits limited to people in business? Not necessarily. Many insurance policies may provide coverage to individuals.

One such policy is called an umbrella liability policy. Like the general liability policies discussed above, umbrella policies provide broad coverage. Some umbrella liability policies provide broader coverage than general liability policies. Many umbrella policies provide coverage for copyright infringement.

A second policy that may cover music piracy claims is called a self contained excess policy. Self contained excess policies generally provide coverage for copyright violation claims and lawsuits against businesses and individuals. Self-contained excess policies contain their own coverage terms, conditions and exclusions, all of which must be reviewed to determine whether coverage is available.

V. Dipping Into Mom And Dad’s Pocketbook.

Many file sharers may be minors and the law generally protects minors from liability for their wrongful acts. There may be instances where the music industry will have no recourse if file swapping was committed by a minor. One way for the music industry to deal with this problem is by suing the adult that owns the on-line account used by the minor to download music. Under this approach, the music industry would have to claim the adult was either negligent in lending their computer to the minor or negligent in supervising the minor while the minor was on line. Claims of general negligence made against parents and guardians could be covered under personal umbrella liability policies.

The typical homeowners’ policy will probably not provide coverage to file sharers because a homeowners policy usually only provides coverage for property damage. Most policies define property damage to mean physical injury. Thus, in order for coverage to exist under the typical homeowners’ policy, the music industry would have to assert that the act of downloading music caused physical injury or tangible damage. It is conceivable that the music industry could argue that because a particular piece of music has been downloaded so many times by so many people, its value has been diluted. It is also conceivable that the music industry could argue that the act of downloading copyrighted music constitutes a civil conversion, akin to criminal theft, of a license to possess and use a particular piece of music. In some jurisdictions, diminution of value and conversion have been found to be covered losses under various insurance policies. These legal arguments have not yet been tested in the music piracy context.

VI. What To Do...And What Not To Do.

No one likes surprises, and insurance companies are no different. That is why virtually every insurance policy spells out specific protocols that dictate what the insured is supposed to do in the event a claim is made or lawsuit is filed against them.

Insurers typically require that claims be made "as soon as practicable." Some policies require the insured notify the insurer of a claim or suit immediately. The safest thing to do is to provide the insurance company with notice of a claim or lawsuit without delay. Many insurance policies include specific instructions on what information the insurer wants and where the information is to be sent. Certified mail with return receipt requested is a good way to have a "receipt" to prove the date when notice was sent to the insurer. The notice should include as much detail about the claim as possible, including names and addresses of the claimant, witnesses, the allegations made, and the relevant time period. If a lawsuit has been filed, include a copy of the complaint should be included. If the insured does not comply with this notice requirement, they could lose all coverage they might otherwise have had.

What if the insured agrees to settle with the music industry? Many people don’t like to pay a bill unless they know what it is that they are paying for and know that it is the best deal. Insurance companies feel the same way. To protect themselves from having to pay for a deal someone else negotiated, insurance companies typically prohibit an insured from agreeing to any settlement or from making any payments without the insurer’s prior consent. To be safe, insureds should run any settlement they are thinking about agreeing to by their insurance company first before settling.

VII. Show The Music Industry The Money.

The music industry has promised more lawsuits in the future, but has not indicated whether it will alter its plan of attack any further. It will be interesting to watch what claims are made in the future and whether new allegations are developed in future lawsuits. It will also be interesting to see whether the music industry will modify their legal theories and allegations to try to tap into potential insurance dollars. After all, the entire file sharing issue is about one thing, money, and a lot of it. With billions of dollars possibly at stake one thing is certain — this issue is far from over.

Copyright 2003, Richard Hodyl, Jr. and Kevin M. Gard, L.L.M. reprinted with permission of the authors. The views and opinions expressed by the authors are their own and are not the opinions of their firms or clients. This article is written for discussion purposes only and does not constitute legal advice nor should it be construed as such.

Richard Hodyl, Jr. heads the insurance coverage department at the law firm of Williams Montgomery & John Ltd. in Chicago and is on the faculty of the Insurance School of Chicago. Mr. Hodyl represents policyholders and insurance companies in the United States and Canada and is an author and speaker on matters involving insurance company operations, policy drafting and coverage issues.

Kevin Gard, L.L.M., is Senior Counsel within Sun Microsystems, Inc.’s Sales, Distribution and Delivery Legal Department in Itasca, Illinois and concentrates his practice on drafting, negotiating and counseling his corporate clients on intellectual property licensing and related transactional matters. Mr. Gard is a member of the Intellectual Property Law Association of Chicago, has published various articles on intellectual property licensing and lectures in the field of intellectual property licensing.

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