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Case 5:04-cv-00371-JW Document 48 Filed 10/18/2004 Page 1 of 24
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UNITED STATES DISTRICT COURT
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NORTHERN DISTRICT OF CALIFORNIA - SAN FRANCISCO DIVISION
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PERFECT 10, INC., a California CASE NO. C 04-00371 JW (PVT)
17 corporation,, [Assigned for all purposes to
Judge James Ware]
18 Plaintiff,
Action Commenced: January 28, 2004
19 vs.
20 VISA INTERNATIONAL SERVICE PLAINTIFF’S COMBINED
ASSOCIATION; FIRST DATA CORP, a OPPOSITION TO MOTIONS TO
21 corporation; CARDSERVICE DISMISS; MEMORANDUM OF
INTERNATIONAL, INC., a corporation; POINTS AND AUTHORITIES
22 MASTERCARD INTERNATIONAL
INCORPORATED, a corporation; Date: November 15, 2004
23 HUMBOLDT BANK, a national banking Time: 9:00 a.m.
association; and DOES 1 through 100, Ctrm: 8
24 inclusive,
25 Defendants.
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2914.060\46039.1 1
PLAINTIFF’S COMBINED OPPOSITION TO MOTIONS TO DISMISS; MEMO. OF POINTS/AUTHORITIES
Dockets.Justia.com
Case 5:04-cv-00371-JW Document 48 Filed 10/18/2004 Page 2 of 24
1 Plaintiff Perfect 10, Inc. (“plaintiff” or “Perfect 10”) respectfully submits the
2 following memorandum of points and authorities in support of its combined
4 and (2) First Data Corp., Cardservice International, Inc., MasterCard International
5 Incorporated, and Humboldt Bank, to dismiss Perfect 10’s first amended complaint
6 (the “FAC”).
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PLAINTIFF’S COMBINED OPPOSITION TO MOTIONS TO DISMISS; MEMO. OF POINTS/AUTHORITIES
Case 5:04-cv-00371-JW Document 48 Filed 10/18/2004 Page 3 of 24
5 Perfect 10. The thieves generally operate from hidden locations around the world,
6 unfindable and unserveable, able to operate anonymously only via the use of credit
7 cards. This grand-scale theft cannot occur without the material help of middle men
8 who, in exchange for a percentage of the sale proceeds of each specific transaction,
12 make the distribution of the stolen materials possible for a fee, whatever the extent
13 and magnitude of their involvement. Adopting such a blanket approach would leave
16 Critically, therefore, this case presents the question whether the financial
17 middle men involved in this massive theft of intellectual property are automatically
18 exempt from liability under any law, including the Copyright Act, despite well-
24 defendants are apparent at the most basic and obvious level. For example, utilities
26 contrast, this is exactly what defendants have done to Perfect 10, as Perfect 10 has
27 been denied the ability to accept VISA cards for its new websites. (FAC, ¶ 84).
28 Moreover, also unlike a utility, even before defendants “turn on the switch”
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PLAINTIFF’S COMBINED OPPOSITION TO MOTIONS TO DISMISS; MEMO. OF POINTS/AUTHORITIES
Case 5:04-cv-00371-JW Document 48 Filed 10/18/2004 Page 4 of 24
1 and provide the thieves with their internet merchant accounts and processing
2 services, all defendants exercise their right to supervise and control that internet
7 deciding which ones to honor and which to reject. In the process, defendants create
8 and retain records of each transaction, including the identity of the internet merchant
12 sell their products. If those representations turn out to be false, defendants require
13 internet merchants to pay penalties and to indemnify defendants against losses that
14 flow from the illegality. Internet merchants must advertise defendants’ logos on
15 their websites. Merchants cannot change the type of business they do without
20 merchants, always reserving (but not always exercising) the right and ability to
21 discontinue services or impose fines at any time for illegal business practices or
24 Defendants know that, when they honor a charge, the direct and immediate
25 result is that a product or service, or the right to receive it, passes from the merchant
26 to the consumer. If defendants are on notice that the merchant’s business consists of
27 selling access to infringing images—which defendants herein concede they are for
28 purposes of the instant motions--defendants know that each time they approve a
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PLAINTIFF’S COMBINED OPPOSITION TO MOTIONS TO DISMISS; MEMO. OF POINTS/AUTHORITIES
Case 5:04-cv-00371-JW Document 48 Filed 10/18/2004 Page 5 of 24
6 defendants’ gloss, a thorough reading of Grokster and the cases upon which it relies
7 establishes that plaintiff has alleged facts that show that defendants can and should
9 additional facts that address each of the concerns this Court stated in its order
11 This Court has made it clear that it is inclined to dismiss this case, with
12 prejudice. Plaintiff respectfully requests that the Court reconsider its views in light
13 of Grokster and the new allegations, and deny the instant motion, in its entirety.
19 1. Vicarious Infringement
20 The Order stated that plaintiff failed to allege facts sufficient to show the right
21 and ability to control the infringing activities. The bases for the ruling were the
22 Court’s findings that (1) infringing websites could continue their alleged infringing
23 conduct if defendants rescind their services; (2) defendants cannot dictate the
24 websites’ content; and (3) the websites are not bound by defendants’ internal
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26 The Court raised the same or similar issues with respect to plaintiff’s non-
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copyright claims. Those issues are addressed in the discussions of those and other
claims at sections V and VI, below.
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3 2. Contributory Infringement
4 The Order stated that with respect to contributory infringement, plaintiff had
5 to allege “a relationship between the financial services provided by defendants and
6 the alleged infringing activity as opposed to the mere operation of the website
7 business.” The bases for the ruling were (1) defendants’ services are “content
8 neutral”; (2) defendants do not promote the websites; (3) defendants do not have
9 content-specific regulations; (4) Stolen Content Websites can obtain credit card
17 regulations, and to the contractual rights they insist upon, defendants direct
18 merchants who accept their credit cards and who operate internet websites to alter or
19 delete contents of those websites in order to comply with laws and/or Visa and
20 MasterCard rules, regulations, and policies.” (FAC, ¶ 20). Defendants also inspect
21 websites (FAC, ¶ 26). Moreover, defendants use more subtle techniques to direct
24 which webmasters would normally receive from their existing clients. (FAC ¶¶ 21,
25 22, 29).
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The Court did find that plaintiff had alleged sufficiently that defendants receive a
financial benefit from the infringing conduct.
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1 Second, although the Order stated that infringing websites could continue
2 their alleged infringing conduct if defendants rescinded their services, the FAC
3 specifically alleges that the “Stolen Content Websites cannot exist without the
4 knowledge and direct participation of the financial institutions that process the credit
5 card transactions for such unlawful material … .” (FAC, ¶ 7). The reason Perfect 10
6 has made this allegation is that without the assistance defendants provide, the
7 infringing activity would be devoid of any commercial viability, and the unlawful
9 For example, merchant banks (e.g., Humboldt) directly, and indirectly through
10 intermediaries that they supervise and control, provide the infringing webmaster
11 with a merchant account. Without the merchant account, the infringing webmaster
12 would not be able to process any credit cards or electronic checks and would, as
14 Third, although the Order stated that, “[t]he allegedly infringing websites
15 could employ intermediate payment services if defendants terminated their merchant
16 accounts,” this is not correct. In the FAC, plaintiff alleges that it cannot process
17 Visa cards for its new website(s), whether through intermediate payment services or
18 otherwise. (FAC, ¶ 84). Perfect 10 did not discover this until after it filed its
19 original complaint. Furthermore, the Court’s finding that “[t]he websites could also
20 use alternate forms of payment such as personal checks, money orders, debit cards,
21 or other credit card providers” is contrary to Perfect 10’s allegation that “Stolen
22 Content Websites cannot exist without the knowledge and direct participation of the
23 financial institutions that process the credit card transactions for such unlawful
24 material.” (FAC, ¶ 7). It simply is not feasible for someone in the United States or
25 Australia who wanted to access a website that was hosted in Bulgaria or Vanuatu to
26 send a personal check to Bulgaria or Vanuatu and then wait several weeks to get a
28 Fourth, although the Order stated that defendants’ regulations are content-
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1 neutral, Perfect 10 has alleged that defendants have enacted, though not enforced,
4 at issue in this case have been found. Through defendants’ merchant agreements,
8 allegations that pertain to right and ability to supervise and material contribution.
9 Each Stolen Content Website merchant has a contract with defendant First
10 Data Corp. (“FDC”) and/or defendant Cardservice International, Inc. (“CSI”)
12 agreement. (FAC, ¶ 16.) The Acquirers act as the agents of member banks,
17 Visa and/or MasterCard examine the transaction and authorize or reject it.
18 (FAC, ¶ 10.) If they approve the transaction, the Acquirer then purchases it
19 from the merchant at a discount. Since the process occurs electronically, the
20 merchant receives the net proceeds immediately after defendants authorize the sale.
21 (FAC, ¶ 11.) Visa and MasterCard receive a fee on each and every transaction.
22 (FAC, ¶ 13.)
23 Visa and MasterCard administer their credit card networks, imposing rules
24 and regulations on Acquirers and member banks, which the Acquirers enforce on
27 merchants suspected of illegal activity, and require them to terminate merchants that
28 they find are engaged in illegal activity. Visa and MasterCard also require
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6 impose many of the terms and conditions in the merchant agreements because Visa
7 and MasterCard rules require them to do so. (FAC, ¶ 15.) Those merchant
14 merchants also have to allow defendants to use the merchants’ names in defendants’
18 regulations applicable to” its business and to “warrant[] that it has the right to sell
19 the products it sells and to use the names it uses.” (FAC, Ex. 1, ¶ 3.01.)
10 (FAC, ¶ 24.) 3
11 10. Defendants control the amount of credit card sales merchants make
12 each month. Since defendants know that virtually all of the Stolen Content
14 expand the volume of illegal transactions in which the Stolen Content Websites
15 engage each time defendants increase the volume limits of such websites.
16 (FAC, ¶ 25.) Defendants also know that withdrawing their licenses would put the
22 merchants’ bank statements, tax returns, credit reports, and other private
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Visa’s discussion about Macy’s and Pizza Hut, at page 11, note 5 of its motion,
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takes this allegation to an absurd level. A practical example of defendants’ control
26 is that a neighborhood shoe store would need approval to go into the pizza business.
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Another is that a website selling magazine subscriptions would need defendants’
approval to sell the ability to download adult images.
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2 presence in the United States in order to evade criminal and civil liability for their
6 (Id., ¶ 27.)
10 In addition to the foregoing, defendants have special rules and regulations that
11 apply specifically to a special class of merchants that defendants have dubbed “High
12 Risk Sponsored Merchants.” Stolen Content Websites are High Risk Sponsored
13 Merchants. (FAC, Ex. 3, pp. 6-8.) Third parties that defendants control, called
14 Internet Payment Service Providers, submit charges for payments on behalf of High
15 Risk Sponsored Merchants. (Id.) In addition to the transaction processing fees and
16 high discount rates, Visa charges “High Risk” merchants an extra $500 to join the
17 program, plus membership dues of $250 per year. (Id., Ex. 3, p. 8.)
18 Defendants exert even more control over those Stolen Content Websites that
19 feature “celebrity porn.” The additional rules include the following:
1 Id., Ex. 3.
7 v. Cherry Auction, Inc., 76 F.3d 259 (9th Cir. 1996), plaintiff stated a claim for
8 vicarious infringement by alleging that defendant swap meet operator (1) controlled
9 and patrolled the premises where vendors sold their infringing recordings; (2) had
10 the ability to control the vendors because it had the right to terminate them for any
11 reason; (3) promoted the swap meet; and (4) controlled customers’ access.
12 In A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1023-1024 (9th Cir.
13 2001), defendant had (1) “the right to control access to its system,” (2) the “right
14 and ability to police its system,” and (3) the ability to locate infringing material
15 through its indexing system. In UMG Recordings, Inc. v. Sinnott, 300 F.Supp.2d
16 993 (C.D. Cal. 2004), defendant flea market owner (1) ran the flea market, (2) set its
17 rules and regulations, (3) reserved the right to inspect merchandise and to refuse or
18 cancel rentals, (4) restricted the type of merchandise sold, and (5) employed security
19 guards to enforce the rules. Defendant’s “security personnel can, and have, ejected
20 both customers and vendors for violating these rules.” Id., at 995.
21 After this Court granted defendants’ earlier motion to dismiss, the court in
22 Metro-Goldwin-Mayer Studios, Inc. v. Grokster, Ltd., 380 F.3d 1154 (9th Cir. 2004)
23 held that distributors of peer-to-peer software who did not index infringing files
24 were not secondarily liable for copyright infringement. The court used the examples
25 of a dance hall operator and a landlord, also discussed in Fonovisa, to illustrate the
26 difference between having the right and ability to supervise and not having it.
1 from a historical distinction between the paradigmatic “dance hall operator” and
2 “landlord” defendants. … The dance hall operator is liable, while the landlord
3 escapes liability, because the dance hall operator has the right and ability to
4 supervise infringing conduct while the landlord does not. … Thus, the “right and
5 ability to supervise” describes a relationship between the defendant and the direct
6 infringer.
7 The court then identified a number of “salient characteristics” of the right and
8 ability to supervise which are often, but “not always” present. They are (1) “a
9 formal licensing agreement between the defendant and the direct infringer,” (2) the
10 right to block access to users, (3) requiring users to register in order to access a
11 system, (4) promoting the infringers, (5) the ability to block access to customers of
12 the infringers, (6) the ability to control infringers through rules and regulations, and
13 (7) maintenance of “central indices or files.” (Id. at 1164-1165.) Each factor need
15 Defendants in Grokster did not have the right and ability to supervise the
16 infringing parties because they (a) did not have formal licensing agreements with the
17 infringers, (b) did not have the ability to block access to individual users, (c) did not
18 require users to register with them, (d) did “not operate an integrated service …
19 which they monitor and control,” and (e) were completely decentralized. (Id. at
20 1165-1166.)
21 In contrast, defendants in the case at bar are analogous to, but have much
22 more control than, dance hall operators, and have nothing in common with “a
23 landlord who lack[s] knowledge of the infringing acts of its tenant and who
24 exercised no control over the leased premises.” See Fonovisa, 76 F.3d at 262.
25 While a dance hall operator controls the activities in his dance hall, defendants
28 MasterCard or Visa cards, defendants can stop sales to the vast majority of the
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2 defendants can shut down sales of stolen materials almost completely. This level of
3 control over the worldwide distribution of stolen materials dwarfs any similar
4 control in other cases where liability was found. In this case, defendants have each
5 of the “salient characteristic[s]” of the right and ability to supervise, including those
11 856 (1969). Acquirers, under the auspices of and pursuant to the rules and
14 Second, defendants have “an express policy reserving the right to block
15 infringers’ access,” including for the illegal conduct alleged in the FAC. (FAC, ¶¶
19 other respects.
25 stolen materials.
2 members who each pay $30 a month, the webmaster would receive $60,000 a month
4 This type of stranglehold over the infringer’s business was not present in any of the
9 purposes of the instant motion defendants do not dispute that they have notice of the
10 Stolen Content Websites’ illegal sales, defendants know from their records of a
14 misplaced. First, that case had survived the pleading stage and the court was ruling
15 on a motion for summary judgment. Second, the court denied summary judgment
16 because there were questions of fact as to whether defendant computer fair operator
17 had the right and ability to supervise vendors. Specifically, the court found
19 control and whether the small number of defendant’s security personnel were
21 In the case at bar, plaintiff has alleged that defendants employ specific
22 measures to assure their control over merchants and their ability to locate products
23 that merchants have no right to sell. Plaintiff has alleged that defendants impose a
24 web of rules and regulations on merchants, that defendants inspect merchants and
25 their websites as a matter of course, and that defendants are aware of each and every
27 function of a switch that immediately opens the gate for publication of the infringing
28 material. Plaintiff has alleged more facts showing defendants’ right and ability to
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1 supervise than were present in any of the cases where courts found that defendants
2 were or could be found vicariously liable for copyright infringement. That is not
3 surprising in view of the strict control that defendants exert over merchants and
4 consumers.
8 elsewhere is a red herring. Vendors in Fonovisa could find other swap meets. The
9 kids who used Napster now use Grokster. The issue in this motion is defendants’
10 relationship with the infringing merchants, not speculation about the existence of
12 In the Order, this Court suggested that, since Perfect 10 was able to obtain
13 processing after defendants put it on the black list, therefore Stolen Content
14 Websites could also obtain processing elsewhere, somehow reducing the materiality
16 severely curtailed Perfect 10's ability to obtain processing, so that Perfect 10 cannot
17 accept Visa cards on new websites. Second, even if it were relevant, which it is not,
19 fact not appropriate for a Rule 12(b)(6) motion. Whether merchants that defendants
20 terminate because their businesses consist wholly of illegal transactions could obtain
28 Defendants' financial support effectively eliminates the need for any physical
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1 "site and facilities". Solely due to defendants’ support, Stolen Content Websites
2 need only a computer to operate, and can do so from any location in the world,
5 transaction and are the virtual conduit for each transaction. Defendants provide the
9 because defendants evaluate each merchant based, among other things, on the
10 legality of the enterprise. Plaintiff has alleged that the infringing websites could not
11 survive without the ability to accept credit cards in payment of their illegal
13 The Grokster court was clear that providing “site and facilities” is not the
14 only indicia of liability. See Grokster, 380 F.3d at 1163 (material contribution
17 a non-“site and facilities” case in which the court found secondary liability for
19 Inc., 948 F.Supp. 1449 (C.D. Cal. 1996). In that case the court held a defendant that
20 sold blank audio tapes knowing that the buyers intended to use them to illegally
26 provision of a merchant account and the ability to process MasterCard and Visa
27 cards, infringers would not be able to function viably in any location. In the site and
1 defendants control, are “virtually present” at, and pass on the validity of, each
2 individual transaction. As previously stated, no court has held that a defendant must
3 be the only means of support available to materially contribute, and even if that
4 were the criteria, whether websites could obtain processing elsewhere is a question
6 ability to process MasterCard and Visa charges, the vast preponderance of infringers
10 other cases in this Circuit in which secondary infringement has been found.
11
17 product knowing that the recipient is using the product to engage in trademark
18 infringement.” Fonovisa v. Cherry Auction, Inc., 76 F.3d 259, 264 (9th Cir. 1996)
19 (emphasis added). Defendants are liable under both of these standards for the same
23 payment for products and services. The Acquirers actually purchase individually
24 from the websites every credit card charge of stolen material. (FAC, ¶ 9.)
25 Therefore, the Acquirers provide the Stolen Content Websites with a direct incentive
26 for each sale. Since defendants fund the websites, defendants provide the financial
28 Defendants also satisfy the alternative test for liability. Defendants do not
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1 dispute that they are on notice that the Stolen Content Websites’ use their product,
3 defendants do not merely provide the ability to accept credit cards. Defendants’
5 Defendants also monitor and apply strict regulations to each and every transaction,
11 transactions with third parties or exercise joint … control over the infringing
12 product.” Hard Rock Café Licensing Corp. v. Concession Services, Inc., 955 F.2d
13 1143, 1150 (9th Cir. 1992). Defendants and the websites are in a symbiotic
15 according to defendants’ rules and regulations and defendants share the profits,
16 transaction by transaction.
17 Defendants and the websites have authority to bind each other in transactions
18 with third parties. When defendants accept a charge, their agreement with the
19 websites binds them to process the charge and to cause the consumer’s account to be
21 products to third parties. It also requires merchants to adhere to the charge back
23 charges. Accordingly, plaintiff has stated claims for contributory and vicarious
24 trademark infringement.
1 publicity for the same reasons that they are liable for vicarious and contributory
3 in the websites’ overall business and in each individual charge transaction. Emery v.
5 Defendants’ participation includes, but is not limited to, that they require
6 websites to warrant the legality of their products; defendants require websites to
7 follow defendants’ rules and regulations; defendants review websites and their
8 business practices; defendants set volume limits and, therefore, the amount of
9 business a website may conduct; defendants monitor what products merchants can
10 and cannot sell; and defendants require Stolen Content Websites to maintain
16 Stolen Content Websites’ illegal activity and aid and abet that activity. As set forth
17 more fully above, defendants are virtually present at and directly involved in each
18 and every transaction. When they accept a transaction, they knowingly open the
19 gate for the websites’ publication of stolen material. Defendants aid and abet the
20 activity by providing the financial services, and imposing the myriad of attendant
21 rules and regulations, that allow the websites to survive. Therefore, the FAC alleges
22 facts sufficient to state claims for unfair competition and false advertising.
23 VII. CONCLUSION
24 For each of the foregoing reasons plaintiff respectfully requests that this Court
25 deny the instant motion, in its entirety.
26
27 DATED: October 18, 2004 KING, HOLMES, PATERNO & BERLINER, LLP
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By:
3 STEPHEN D. ROTHSCHILD
Attorneys for Plaintiff PERFECT 10, INC.
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1 TABLE OF CONTENTS
2 Page
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I. INTRODUCTION................................................................................................................. 3
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A. Supervision and Material Contribution ..................................................................... 3
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B. Applying the Ninth Circuit’s Analysis in Grokster................................................... 5
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Establishes That Defendants Have Stated Claims for Relief ................................................ 5
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II. STATEMENT OF FACTS.................................................................................................... 5
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A. The August 5, 2004 Order......................................................................................... 5
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1. Vicarious Infringement ................................................................................. 5
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2. Contributory Infringement ............................................................................ 6
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B. Allegations of The Amended Complaint That Respond to the ................................. 6
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III. DEFENDANTS ARE VICARIOUSLY LIABLE BECAUSE THEY HAVE
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THE RIGHT AND ABILITY TO SUPERVISE INFRINGING WEBSITES.................... 12
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IV. PLAINTIFF HAS STATED A CLAIM FOR CONTRIBUTORY
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COPYRIGHT INFRINGEMENT ....................................................................................... 16
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V. PLAINTIFF HAS ALLEGED FACTS SUFFICIENT TO STATE CLAIMS
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FOR TRADEMARK INFRINGEMENT............................................................................ 18
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A. Contributory Trademark Infringement.................................................................... 18
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B. Vicarious Trademark Infringement ......................................................................... 19
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VI. PLAINTIFF HAS ALLEGED FACTS SUFFICIENT TO STATE ITS
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REMAINING CLAIMS ...................................................................................................... 19
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A. Rights of Publicity................................................................................................... 19
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B. Unfair Competition and False Advertising ............................................................. 20
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VII. CONCLUSION ................................................................................................................... 20
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1 TABLE OF AUTHORITIES
2 Page
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4 FEDERAL AUTHORITIES
5 A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1023-1024 (9th Cir.
2001)..........................................................................................................12, 17
6
Adobe Systems Incorporated v. Canus Productions, Inc., 173 F.Supp.2d 1044
7 (C.D. Cal. 2001) ..............................................................................................15
8 Fonovisa, Inc. v. Cherry Auction, Inc., 76 F.3d 259 (9th Cir. 1996) ................ passim
9 Hard Rock Café Licensing Corp. v. Concession Services, Inc., 955 F.2d 1143,
1150 (9th Cir. 1992) ........................................................................................19
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Metro-Goldwin-Mayer Studios, Inc. v. Grokster, Ltd., 380 F.3d 1154
11 (9th Cir. 2004) ........................................................................12, 13, 14, 16, 17
12 UMG Recordings, Inc. v. Sinnott, 300 F.Supp.2d 993 (C.D. Cal. 2004) ..................12
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CALIFORNIA AUTHORITIES
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Emery v. Visa International Service Association, 95 Cal.App.4th 952, 962 ............19
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Galvan v. Superior Court, 70 Cal.2d 851, 856 (1969) ..............................................14
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PATERNO 2914.060\46039.1
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PLAINTIFF’S COMBINED OPPOSITION TO MOTIONS TO DISMISS; MEMO. OF POINTS/AUTHORITIES