Why Kim Dotcom Has a Case: The Truth Behind The Megaupload Indictment

When Megaupload was shut down on Jan. 19, Anonymous and other proponents of online freedom took to the Internet to protest what they considered to be an unprecedented and egregious act, one unheard of in the history of copyright battles.

Certainly, the scope of the actions taken against Megaupload founder Kim Dotcom and his associates are unique.

Dotcom was slapped with a 72-page indictment that threatened to send him to prison for 50 years, charging him with everything from violating the Digital Millennium Copyright Act (DMCA) to money-laundering and bribery, took two years and required the cooperation of several international allies for the U.S. Justice Department to complete.

But to say that the facts of the Megaupload case are rare would be to ignore one invaluable precedent, one that the officials who wrote the indictment seem to have been doing their best to hide.

Before there was a federal raid in 2012 on the Dotcom mansion, there was a massive lawsuit filed back in 2007 that ended in 2010. Before copyright holders like Universal Music pushed for action by the Justice Department, there was a titanic copyright holder called Viacom.

And before there was Megaupload, there was a site called YouTube.

Here's why their two cases aren't nearly as different as you think.

Viacom v. YouTube

In 2007 one of the largest media companies in the world, Viacom Inc., filed a lawsuit against YouTube and its parent Google, which accused both of massive, brazen copyright infringement.

Viacom argued that the video-sharing site, which allows users to upload, view and swap video files, was engaging in intentional illegal activity by displaying and reproducing Viacom-owned materials without having any right to the content.

It argued, convincingly, that the defendants in the case not only knew that copyright infringement was taking place, but that the site's hosts would often engage in, promote and induce copyright violations. The corporation's lawyers even asserted that YouTube had built up an entire library of illegal materials that it used to increase traffic and advertising revenue.

Sound familiar? It should. The copyright infringement charges Viacom Inc. brought against YouTube are in many ways identical to those leveled against Megaupload.

Both sets of defendants were accused not only of having knowledge of online piracy being allowed on their sites, but of tacitly and at times blatantly encouraging this illegal activity to continue.

In both cases, prosecutors argued that the copyright infringement users engaged in on a site was the responsibility of that site's hosts, and that if a site like YouTube or Megaupload was found to be a haven for online piracy, then that could be classified as the site's only function, and would be dealt with accordingly.

Even the assertion that YouTube was compiling a secret library of illegal materials under the guise of promoting copyright-protected video files is eerily similar to the assertion that Megaupload site Megavideo displayed a Top 100 list of legally acquired video files in order to distract copyright holders from the illegal materials they continued to promote.

Ruling Against 'Proactive Policing'

On June 23, 2010, Judge Stanton ruled on the Viacom v. YouTube case in a summary judgment. But he ruled in favor of Google and YouTube.

Judge Stanton argued that the safe harbor provision of the Digital Millennium Copyright Act (DMCA) still protected the YouTube defendants from being accused of copyright infringement, notwithstanding the fact that there was evidence of occasional if not downright prolific infringement on the popular site.

From the plaintiff's submissions on the motions, a jury could find that the defendants not only were generally aware of, but welcomed, copyright-infringing material, the judge admitted.

But to equate the desire for more popular content, which can often include material distributed illegally, with the active encouragement of copyright infringement and hindering of copyright claims, was a false position.

Judge Stanton essentially moved to distinguish the hosts that run a file-sharing site from the activity of the millions of users the site provides a haven for.

A 'service provider'... includes 'an entity offering the transmission, routing, or providing of connections for digital online communications, Judge Stanton wrote in the judgment.

Surely the provision of such services, access, and operation of facilities within the safe harbor when they flow from the material's placement on the provider's system or network: it is inconceivable that they are left exposed to be claimed as unprotected infringements.

What it all came down to was necessary evasion. If the site's owners monitored content and removed illegal material when notified by copyright holders, then whatever personal feelings they might have had about the illegal material being on their site was largely irrelevant.

And if some illegally distributed content remains on the site after sites like YouTube or Megaupload have instituted Abuse Tools and run periodic checks, both of which they did, the onus is on the copyright holders, not the site's owners, to seek out what materials are being illegally uploaded and swapped and to move to have them taken down.

To expect a site's hosts to go beyond these basic measures would be unreasonable, the judge ruled. That kind of proactive policing would contravene the structure and operation of the D.M.C.A., especially when the sites involved are visited daily by tens of millions of people.

YouTube And Megaupload: Similar Differences

Of course, there are some differences between YouTube and Megaupload, but these more cosmetic distinctions don't hold up under scrutiny.

First, Megaupload deals with uploads and downloads of full video and audio files, while YouTube theoretically limits itself to sharing files that are usually divided into portions or are compilations, which makes them easier to be protected by DMCA safe harbor rules.

But full files can just as easily be added to YouTube, and even if the files aren't downloaded from the site, users everywhere can watch entire movies or listen to countless songs that are copyright-protected. Log into YouTube any day of the week, and you're just as likely to find divvied up portions of The Princess Bride as you would have been to find the full version on Megavideo.

Others argue that Megaupload was explicitly and primarily used to dodge copyright violations, an argument which helped MGM Inc. take down the file-sharing site Grokster in 2005.

Since Megaupload's operators have been arrested, however, many users came forward to demonstrate the ways in which they used Kim Dotcom's web sites to store their own work, share their own files legally and allow them to get at their information from any computer.

There were legitimate uses of Megaupload, Web commentator Russell Brown told TV One's Breakfast This Morning last week.

People use file-sharing sites as 'clouds,' places to store legitimate files, which they can access anywhere in the world.

Many musicians and amateur filmmakers used the site as well as YouTube to promote and share their work, and now have their files confiscated.

And while YouTube, in the aftermath of its court case with Viacom, now has corporate partners that back it openly, Megaupload is no less legitimate in terms of by-the-books DMCA regulations and appeasing copyright holders' interests.

The indictment against Kim Dotcom and his associations, even as it accuses the defendants of not doing enough to prevent copyright infringement, admits that Megaupload employed an Abuse Tool in order to monitor and remove illegal material from the sites, gave copyright holders full access to those sites in order to search for possible infringement, and promptly removed whatever links were brought to their attention.

Digging Into The Indictment

If promoting online piracy were the only issue at stake in this case, the move to take down Megaupload would be far more controversial, and the extent of what the Justice Department and copyright holders could prove would be far more tenuous.

In the massive 72-page indictment leveled against the defendants, however, Kim Dotcom and his associates are not only charged with being co-conspirators to copyright infringement, but with money-laundering through their site and openly bribing users to break the law.

These are far more serious charges, and are part of what enabled the U.S. to get at the German national in New Zealand in the first place.

This is where the indictment should have been able to separate the Megaupload case from that of Viacom v. YouTube completely. But as it turns out, these additional charges are just where the unwieldy document becomes the stickiest.

Because the real difference between these two cases, as it turns out, doesn't lie in the fact outlined in the Megaupload indictment. It's how much that same document shows copyright holders' determination to take Megaupload out... even when the charges are nebulous at best.

Creating 'The Mega Conspiracy'

Let's start with the picture that the indictment paints of Kim Dotcom and his business.

The document begins by coining the alleged criminal behavior The Mega Conspiracy, a term that has caught on quickly in the mainstream media.

It then goes on to meticulously detail the possessions seized from his home, the amount of money he has cleared from Megaupload as a whole (including any and all legal activity on the site) and to otherwise paint a picture of his lavish lifestyle and his rather blasé attitude about his past as a hacker.

All of these things, thrown together in one massive indictment, paint the picture of a man running an organized crime ring like a mafia don, not of a man who created file-sharing sites that can be used for online piracy.

Take any of those individual points away from the rest, however, and these details appear either superfluous or simply a sign of smart business.

When YouTube was being sued, there was no talk of the founder's lifestyles, or the massive amounts of money they probably made from allowing copyrighted material to be shared illegally on their site. Those defendants had a powerhouse like Google to protect them.

But a former hacker and current Internet subversive, a man who planned to launch a new site called MegaBox backed by numerous musicians that would have given far more profit to the artists who made them... this was a far more dangerous enemy, and one who was far easier to target.

'They don't stand alone.'

Which brings us to the charges themselves. After being told of Kim Dotcom's string of classic cars and the alleged lengths to which the Mega Conspiracy players tried to cheat copyright holders, it becomes far easier to believe that the defendants were involved in a whole network of criminal activities.

It's incredibly powerful, said Jeff Ifrah, a white-collar criminal attorney based in New York. Ifrah has been recognized by Chambers USA 2011 as one of America's leading lawyers for litigation in white collar crime and government investigations.

When people see the word money laundering, they don't think of it as a separate [charge], he continued. They think it's money laundering if there's copyright infringement, that they don't stand alone, that they're connected.

It's an assumption that prosecutors in this case seem to be relying on. But take a closer look at both the money-laundering an bribery charges, and that connection begins to fall apart.

The Megaupload indictment claims that the defendants paid their permanent members money in exchange for uploading copyright-protected files, and shuttled money to those engaging in the most blatant illegal activity through their site's Premium User rewards program.

This all sounds incredibly incriminating...until the indictment itself muddles its earlier points.

Later on, the authors themselves admit that what Kim Dotcom and associates were actually doing was running a very open rewards program, similar to the kind found on other user-reliant sites, which gives financial incentives for users to become full-time members and to upload popular files.

Some of those users undoubtedly became popular by uploading and sharing copyright-protected files, and some also undoubtedly joined Megaupload in order to use the site's resources illegally.

For the indictment's charges to stick, however, the prosecution has taken that indirect encouragement, which affects some users who upload and share files illegally, and asserts that Megaupload was therefore bribing specific users to upload only unauthorized files.

There is a big gap, in terms of criminal intent, between the first charge, which is simply a good business strategy, and the second, which is actual bribery. And if rewarding popular users for sticking around and uploading popular content is money-laundering, then many other parts of our modern world are criminal enterprises, too.

That would be like you were a money launderer if you paid interest or had a reward system with your bank, Ifrah asserts. Who is basically just a holder of your money and trying to keep you with their company.

Both these charges, therefore, while they sound damning on paper, can very easily be explained through the fact that Megaupload is, after all, a network of sites that depend on their users and their uploads to survive.

If some of those files are illegal, and illegal files are the most popular one on their site, Megaupload cannot be charged with bribing them in order to get unauthorized material up. In this case, copyright holders are really trying to cling to a system of ownership and site responsibility that has been discredited many times over.

Two Different Generations

It's time to be honest. The real issue at stake here should have been about knowledge. How much did the Megaupload hosts know about specific acts of copyright infringement by specific users? How much did they encourage infringement on their site, and actively hamper the deletion of illegal material?

There is proof that the defendants were not only accepting of but rather tickled that copyright infringement happened on their site. And as anyone who's visited Megavideo can attest, there was plenty of infringement going on, even if the majority of it was speedily deleted.

But prosecutors would need a lot more than that to claim that their knowledge amounted to criminal intent. That's a thorny issue, a lot harder to prove, and with SOPA's defeat a lot harder to prosecute.

To help get the case tried and to aid the extradition process that will follow, prosecutors found another way of getting at the site besides simple copyright infringement. And they went for it.

Any time I've seen an indictment that's more than five pages long, then it's either because it's the prosecutor's first time and he doesn't know what he's doing, or it's because, more likely it's because, they want to cover the public in facts, Ifrah said. They want to create an appearance of just total thoroughness.

And those 72 pages, with their often tenuous connections and sometimes outright contradictory assertions, are all to cover up what should have been the focus of this case: just how much criminality can be proved in this criminal case?

What is for certain is that this case is a watershed moment for the future of online freedom and copyright protection.

In a lot of ways, it's like a showdown between two different generations, Ifrah noted.

But as much as the Justice Department, the prosecutors and much of the media have tried to mark this case as unique, the Viacom v. YouTube case is applicable here.

And in that case, YouTube won.