Of Pirates and Porn Trolls

Of Pirates and Porn Trolls
October 2015

If there is a proverbial smoking gun in the surreal saga of Prenda Law, it took the form of the Fifth Amendment, pleaded in a federal court in California in 2013.

“It should be clear by now,” U.S. District Judge Otis D. Wright II said while beginning that hearing, “that this court’s focus has shifted from protecting intellectual property rights to attorney misconduct.”

Three years earlier, the attorneys whose conduct was in question — Chicagoans John Steele and Paul Duffy and Minnesotan Paul Hansmeier — embarked on a campaign to make pornographers money from the widespread theft of adult videos on the Internet. For some time, the innovative group known as Prenda Law was quite successful.

Steele bragged in a newspaper article that he had personally made “millions” during the campaign, which kicked off in 2010 by asserting the copyrights of a series of adult movies called “Amateur Allure.”

Prenda made its money this way: The law firm acquired IP addresses — unique numerical signatures given to computers accessing the Internet — that had been tracked downloading porn through a file-sharing system known as BitTorrent. It named those IP addresses as defendants in copyright-infringement lawsuits. Almost immediately after filing the lawsuits, Prenda’s lawyers asked judges to compel Internet service providers such as Comcast to turn over the names and addresses of the customers associated with the IP-address defendants, which numbered in the hundreds for each case.

Prenda’s lawyers sent those people a letter. It alerted them to the fact that U.S. copyright law may put them on the hook for statutory damages of $150,000. But, if they settled for something closer to $4,000, the case would be dropped and their name would never appear in court, and it would never be publicly associated with watching porn.

Sigh. Relief.

Yeah, right.

In 2012, Prenda filed at least 176 lawsuits against countless defendants across the country, according to legal analytics firm Lex Machina. With a settlement offer lower than the cost of hiring an attorney, defendants were compelled to pay up. But some didn’t. Some hired defense attorneys like Illinois’ Erin Russell, Florida’s Graham Syfert or California’s Morgan Pietz, who probed Prenda’s business model.

“Once I started pulling on the thread it all started to unravel pretty quickly,” Pietz said.

Those attorneys found evidence that Prenda’s lawyers actually owned the offshore entities that they represented as plaintiffs in these lawsuits — evidence the lawyers were their own clients. In an effort to hide that alleged relationship, there were signs that Steele named a caretaker of his Minnesota vacation home as the owner of the companies. But the caretaker, Alan Cooper, testified before Judge Wright that he didn’t know anything about those entities. And he told the judge the e-mail address listed as “Alan Cooper’s” on the company’s articles of incorporation — johnsteele @gmail.com — was not his.

Wright seemed to believe him. He asked Steele, Duffy, Hansmeier and two associates to appear in court and tell him if the dots in front of him connected to the fraud he suspected.

“I want to know if some of my conjecture is accurate,” Wright said at the hearing, according to a transcript.

The group’s attorneys informed Wright that their clients would not answer his questions under the rights provided by the Fifth Amendment.

Less than a month later, Wright ordered Steele, Duffy, Hansmeier and an associate to pay $81,319.72 worth of the defense’s attorneys’ fees. Drawing “adverse inferences” from their refusal to testify, Wright found that Prenda stole Cooper’s identity and that its lawyers were the de facto owners of the entities that owned the porn copyrights at issue.

Wright’s order was largely the basis for a 14,000-word, seven-count complaint the Illinois Attorney Registration & Disciplinary Commission filed against Steele in August. A couple weeks before that filing, Duffy died at the age of 55. Steele declined to comment on the ARDC complaint, which could lead to censure, suspension or disbarment. Prenda, which is now defunct, has been ordered to pay sanctions in at least eight courts across the country totaling more than $1 million, the ARDC complaint says. Most remain unpaid.

“I don’t think anything like this will ever happen again,” said Syfert, who uncovered evidence that Prenda was “honeypotting” — uploading the videos to sites where they could be illegally downloaded, luring people to take them, then accusing them of theft once they did. “It was so brazen.”

Prenda’s legacy is more than an ethics lesson for lawyers. The business model it pioneered — suing owners of IP addresses for stealing Internet porn; often called “copyright trolling” — is healthier than ever.

Since the end of last year, Lex Machina said, more than half of all copyright-infringement lawsuits filed in the U.S. accused individuals (named in suits by their IP addresses) of stealing movies (typically porn) from the Internet.

One company, Malibu Media LLC, which runs the erotic website x-art.com, filed 42 percent of all U.S. copyright lawsuits last year. As of Sept. 4, the pornographer had filed 4,558 lawsuits since 2012. Its favorite place to file? Chicago, home to 598 of its cases, Lex Machina said. That has borne a group of lawyers here like Jeffrey Antonelli who defend individuals in these cases.

“I don’t see any reason for it to slow down,” said Antonelli, who has handled more than 1,100 such cases since Malibu Media began its campaign.

The question, now, is this: Are these lawsuits a Prenda-like money grab fueled by an out-of-date law that provides far-too-high sanctions for copyright infringement? Or do they have a higher calling, helping to curb the problem of piracy that a study commissioned by the International Chamber of Commerce estimates will cost movie studios and record companies between $80 billion and $240 billion this year?

The debate, it turns out, is between a professor at Loyola University Chicago School of Law and Malibu Media’s Florida-based attorney, individuals who have never spoken to each other.

‘More pornography? That’s weird’

From his Near North office in early 2013, Matthew Sag began combing the federal court database known as PACER.

The Australian-born Loyola law professor had set out to compile a broad survey of intellectual property lawsuits in the U.S. He figured he would begin with the devil he knew: Copyright lawsuits in the Northern District of Illinois. He quickly realized he didn’t have a clue.

“I was pulling random cases and thinking, ‘Huh? More pornography? That’s weird,’” Sag said.

He stumbled upon the Prenda licensing campaign, which kicked into high gear in 2012. Intrigued, he went on to write two papers on file-sharing lawsuits.

Sag found that Prenda’s proclivity for filing in its home court helped the Northern District of Illinois become the country’s third most popular venue for copyright litigation in 2012. Just three years earlier, in 2009, it was No. 11, according to Sag’s forthcoming Iowa Law Review article, “IP Litigation in United States District Courts: 1994 to 2014.” The growth was fueled almost entirely by “file-sharing” lawsuits. More of those have been filed here than in any other federal court since 2009, Lex Machina said.

The growth in Chicago may have been unrivaled, but it was not unique.

Sag writes that lucrative lawsuits against people downloading from file-sharing networks have “transformed copyright litigation” in the U.S., accounting for roughly the entire increase in lawsuits filed over the past two decades.

“This should be totally astounding,” Sag said. “No one should look at these numbers and think, ‘Oh, well, I guess that sounds about right.’”

‘A right with no remedy’

Keith Lipscomb, the Miami-based lawyer behind Malibu Media’s copyright campaign, has read Sag’s studies.

“He doesn’t know what the hell he’s talking about, it’s just as pure and simple as that,” said Lipscomb, a Cornell Law School graduate in his early 40s. “He’s an academic with his head in the clouds.”

Sag’s work is impacting Lipscomb’s practice. One of Sag’s articles was cited in July by a federal judge in the Southern District of New York who denied Malibu Media’s request to subpoena Internet companies for the name and address associated with the IP address sued by Malibu.

By Lipscomb’s account, there is a rational reason for the rise in file-sharing lawsuits: The similarly striking surge of online piracy, particularly following the advent of BitTorrent file-sharing.

In the first year BitTorrent was introduced in 2004, it accounted for a third of all Internet traffic, according to research firm CacheLogic. Known as a peer-to-peer file-sharing system, BitTorrent systems have not been held accountable for copyright infringement the way Napster was back in 1999. Still, it is used in much the same way: To disseminate popular videos and music.

While there is no doubt BitTorrent is an easy way to steal copyrighted material, it is difficult to discern the true economic cost of piracy to the movie and music industry. Studies range from suggesting it is as little as zero for the movie industry and something nominal for musical artists (people may be willing to steal a movie they wouldn’t pay to see in theaters, for instance) to figures backed by the International Chamber of Commerce that range up to $240 billion a year.

Malibu Media’s troubles with piracy were documented in a 2014 article in The New Yorker. After the pornographer grew to 50,000 subscribers a month and became profitable, subscriptions plateaued. Its movies remained popular, though. An investigator determined 80,000 people in the U.S. were watching its pirated movies each month, with another 220,000 participated globally.

“There’s a right with no remedy,” Lipscomb said, arguing the copyright system is “broken.”

“The only way to fight this is the way that we are, which is going after the worst of the worst infringers and trying to make it work.”

‘Monetizing infringement’

If anything, Sag believes the remedy for those whose rights have been stolen is too high.

His critique of what he calls “settlement mills” begins with the price range that the law puts on each act of infringement: $750 to $150,000. For comparison, illegally parking in a handicap spot, he notes, is a $500 fine. A DUI in Illinois, for a first-time offender, can cost upward of $3,000. Kidnapping, he said, comes with a $150,000 fine (and a likely prison sentence).

“That is a pretty big range and it just seems absurd,” Sag said. “The statutory damages range for file-sharing should be a lot less.”

He also refutes the idea that file-sharing lawsuits are a natural response to the rise of piracy.

If this is an effective method to stop Internet piracy that is affecting the entire creative industry, why are only pornographers — indeed, one pornographer — pursuing it on a grand scale? Lex Machina said Malibu Media has filed 15 times more copyright lawsuits, more than 4,300, than the next most litigious plaintiff since 2009.

In Sag’s view, these lawsuits are a business, proved profitable by Prenda — at least until its untoward courtroom antics caught up to it — and “perfected” by Malibu Media.

“Nothing against Malibu Media, but we didn’t set up a court system and a copyright system so that they could go around monetizing infringement,” Sag said. “These people are paying, in the end, around $4,000 for a film they could have bought, I presume, for $20.”

Prenda’s progeny?

The first thing Lipscomb wanted made clear in an August phone interview is that Malibu Media “is not remotely related to Prenda.”

“I feel awful that they turned what I believe is a social cause into a profit center,” Lipscomb said later, about an hour into the conversation.

Yes, they both sue IP addresses. But Lipscomb said that’s about where the similarities between Prenda and Malibu Media end. In fact, Malibu Media’s litigation campaign has been tarnished by lazy and inaccurate comparisons to Prenda, he said.

Prenda’s undoing stemmed from litigation tactics that courts ultimately ruled were unethical or, in some cases, illegal.

Prenda’s cases typically joined hundreds of IP addresses in the same lawsuit for stealing one movie.

Once it got the names of defendants, it only pursued settlements through demand letters and rarely, perhaps never, served defendants with lawsuits.

In more than one instance, Prenda’s lawyers were accused of cutting an unseemly deal with defendants: In lieu of paying a settlement, Prenda offered, just agree to be sued and agree to be represented by a lawyer Prenda suggests. That lawyer would then stand aside and not contest a motion to compel Internet companies to hand over a list of names and addresses associated with the other IP addresses in the lawsuit.

This prompted one Cook County associate judge, Sanjay T. Tailor, to ask John Steele and the lawyer purportedly representing the defense, “Are you two in bed together?” according to Erin Russell, who was present at the Daley Center hearing.

Getting their defendants names was really all Prenda cared about. The shame of being named a porn thief would typically ensure payment.

The critique — mostly made online at websites such as dietrolldie.com — that Malibu Media, like Prenda, is not interested in pursuing litigation, is “total f---ing bulls---,” Lipscomb said.

“We serve something like 38 percent of the defendants (with lawsuits) and take them all into discovery,” he said. “There are 50 people who work on this and they litigate daily. The critique that these aren’t litigated is bulls---. It’s told by people who don’t have a clue what the hell they’re talking about.”

‘Can I make it work for you?’

Lipscomb offers strong defenses for two other criticisms often lobbed at Malibu Media.

The first is that his client’s lawsuits can be erroneously filed against individuals who merely pay the Internet bill, not those who actually downloaded the porn.

Lipscomb said Malibu Media only targets people who are building “virtual Blockbuster stores of stolen content on their computers.” In order to be sued, a defendant must have illegally downloaded at least 200 movies in total and at least 12 from x-art.com, he said.

Documents in PACER sampled from two of Malibu Media’s ongoing lawsuits show a list of 94 and 24 infringed x-art.com titles, respectively.

Once that threshold is met and the name of the related Internet subscriber is acquired, Lipscomb said Malibu Media “analyzes the crap out of it” to ensure that person downloaded the porn before naming them in a lawsuit. That analysis is what a nationwide group of 50 litigators “is doing every day.”

“The whole focus of this is proving that the people we are alleging did the infringement actually did,” he said. “We let 35 percent of these people go right off the bat and don’t serve anybody because we’re not sure.”

And if they get it wrong, he said, there are safeguards in the law: The copyright act allows wrongly named defendants to receive their attorney fees.

These elements of his litigation model add costs to his practice, which also serves as part of his defense to a critique made by Sag: That more movie producers would be pursuing this litigation if it was effective at stopping piracy.

It is not the case that Hollywood is uninterested in this type of litigation campaign, Lipscomb said. Far from it. He said he has spoken with 15 movie studios, “all the way from people making movies for the Lifetime Channel up to the bigger ones,” and almost every one expressed interest in hiring him.

The problem is the lawsuits would not be profitable.

“They wanted us to do this. But the question is: Can I make it work for them? And I can’t,” he said.

“It’s working for Malibu Media right now, marginally. It’s going to work for some other people I’ll bring into it next year. But it’s not going to work for the bulk of Hollywood who really want it to work.”

Let Lipscomb explain: For a plaintiff to make money suing one defendant, that person must have stolen multiple movies from that plaintiff.

That is because with each stolen movie the minimum statutory payment increases by at least $750. So, for Malibu Media, which requires 12 acts of infringement in order to file a case, lawsuits become economically feasible when the minimum potential damages are somewhere around $9,000.

And while plenty of Internet users have downloaded 12 films from, say, Warner Bros., most large-release movies are structured as their own corporate entity (typically LLCs). Hollywood studios, like real estate developers, compartmentalize their assets in this way because of tax rules that help soften the financial blow of box office flops. At the moment, that structure is also preventing the studios from becoming the next Malibu Media.

“If it wasn’t for that problem, Hollywood would jump on this like a banshee because they hate the problem of piracy,” Lipscomb said.

A solution to end ‘trolls’

Lipscomb suggests that Congress could fix Hollywood’s — and the porn industry’s — piracy problem in either one of two ways.

First, he said it could raise the minimum statutory damages for copyright infringement to $10,000. That would make it economically viable to sue one individual who has illegally downloaded one movie.

“You have to make the suits economically worthwhile,” he said.

The proposal is directly at odds with Sag’s idea to lower the damages.

“Piracy is a problem,” Sag said, “but just because something is a problem doesn’t mean you bring out the nuclear weapons to deal with it.”

Lipscomb’s second suggestion involves creating a “ticketing system” for copyright infringement made by file-sharing users.

If an Internet subscriber was found to have stolen a video, he or she would receive a warning once or perhaps twice. Then, a graduated scale of smaller fines — $50 to $100, say — would kick in. This would also require a law holding the person who pays Internet bills liable for any copyright infringement that happens from their account.

“It is so easy,” Lipscomb said, “and then you solve a $100 billion problem with a very small change that hurts no one and actually solves the problem.”

Sag believes the cost of such a system would be immense. Companies like Starbucks, he said, would likely stop providing free Internet for fear they would be put on the hook for their customers’ theft.

Still, Sag commended the thrust of Lipscomb’s idea, saying “it might be right in some ways.”

“Malibu Media says they want to take a bite out of piracy?” he said. “If that’s right, then they’re operating on a very different basis to Prenda, who obviously didn’t care less about piracy.”

Lipscomb’s ticketing proposal seems to leave out one crucial component: How would he make money under such a system?

“I’ve never been in this for money,” Lipscomb said, adding that Malibu Media only comprises one-third of his law practice. “I’ve been in this for the fact that I love what I do and I actually, passionately believe that what I’m doing is right.”

As for his plans if such a system never materializes?

“Just keep fighting,” he said. “You either give up and the Internet is just a free-for-all and people lose art to theft and things don’t get made or I keep fighting. So I just keep fighting.”