Fighting Megaupload Piracy With…Piracy?

By Asher Hawkins

Last week, the Obama Administration criticized SOPA and PIPA for their associated risk of fostering censorship. At the same time, the Administration stated it would combat online piracy perpetrated by foreign websites.

Looks like the promise to crack down on piracy was more than mere saber-rattling.

Yesterday, less than 24 hours after the conclusion of the Stop-SOPA Blackout, the U.S. Department of Justice announced a sweeping indictment targeting the leaders of Megaupload.com, a popular Hong Kong-based file-sharing site that, according to the feds, allows users to access pirated copies of movies, music and other copyright-protected works.

Megaupload’s top seven honchos – none of them U.S. citizens, and four of them arrested Thursday by local New Zealand law enforcement upon a request from American authorities – are accused of heading up an organized criminal enterprise whose main goal was criminal copyright infringement.

But the feds’ actions may just be outside the scope of existing U.S. statutory law. The whole idea behind the Stop Online Piracy Act (the House of Representatives version of the controversial legislative initiative) and the Protect Intellectual Property Act (the Senate version) is that our existing laws don’t give the feds the legal weaponry needed to protect works under U.S. copyright from the scourge of foreign online piracy.

Does U.S. law apply to wrongdoing committed (or primarily committed) overseas? It’s a complicated issue that our judicial system has increasingly grappled with in recent years. Thursday’s news reports about the shutdown of Megaupload – here’s a run-of-the-mill mainstream-media report from ABC News, and here’s a more in-depth piece from Wired – didn’t address this “extraterritoriality” issue.

So we decided to do just that.  

Ask a dozen international law buffs to name the most important legal ruling of the 21st century, and many will name the 2010 Supreme Court decision in Morrison v. National Bank Australia Ltd. The case began when Australian stockholders who had purchased shares of an Australian bank on a foreign exchange saw the value of their shares plummet in the early 2000s thanks to the bank’s ill-timed purchase of a Florida mortgage-servicing company. The stockholders filed a civil suit against the bank in the U.S., but the justices ultimately ruled that the Aussie plaintiffs could not use U.S. securities-fraud legal protections to their advantage.

Without getting bogged down in too much legalese, the upshot of the Court’s reasoning was that because the statute in question did not expressly state that it applied to foreign securities purchases, the justices could not assume that it was meant to have an “extraterritorial effect.”

As this excellent analysis piece from ConflictOfLaws.net explains, Morrison’s holding was soon extended beyond the confines of securities law and into other, big-money areas of civil litigation. But when it comes to criminal prosecutions, judges have been reluctant to use Morrison to limit the feds’ ability to target crimes that are committed overseas but have some connection to the U.S. One example: Last year the federal appellate court based in New York rejected an appeal by a child molester with U.S. citizenship who, after transporting a minor between Belgium to Israel,  sought to have his conviction overturned by relying on Morrison. As many judges see it, the Morrison presumption against extraterritorial effect applies in civil cases, but not necessarily in criminal ones. They base their conclusion on the landmark 1922 Supreme Court decision in U.S. v. Bowman. In that ruling, the Court held that the law against defrauding the federal government could be used to prosecute officers on a federally owned steamship who were involved in an oil-embezzlement scheme in Brazil. Using a U.S. law to prosecute criminals internationally, these jurists believe, is fair game, so long as the language of the statute in question could be reasonably interpreted as supporting extraterritorial application.

But last March, Judge Gladys Kessler of the federal court in Washington, D.C., issued a widely read decision in which she suggested that even for criminal violations, the government shouldn’t get an automatic pass on the presumption against extraterritorial effect. Judge Kessler’s ruling came in a racketeering suit against a British tobacco company for misleading statements about the effects of smoking. (Although the case was technically a civil suit, it involved government enforcement of a criminal statute.) The judge noted in her ruling that, as a result of Morrison, the U.S.’s RICO law doesn’t have extraterritorial effect in civil suits brought by private parties. Further, she wrote, in the context of government enforcement of criminal statutes, Bowman permits extraterritorial effect only when the criminal conduct at issue is against the government itself – for example, stealing oil purchased by the government and selling it for personal profit.

Back to the Megaupload situation. The accused ringleaders are all foreign nationals. (N.B.: Megaupload’s putative chief executive, American rap producer Swizz Beatz, was not named in the indictment… maybe the heads of the DOJ’s IP Task Force are Alicia Keys fans?) Though the government has evidence that servers located in the U.S. performed some support services for Megaupload, and that the bulk of Megaupload’s subscriber payments were processed via U.S.-based PayPal, it seems likely that the actual site administration that allowed users to transfer (allegedly) pirated materials – as well as any uploading of infringing materials on the part of Megaupload personnel themselves – was performed overseas.

The big question now is whether the feds can persuade a judge that existing U.S. statutes criminalizing racketeering and copyright infringement were intended to cover an extraterritorial enterprise such as Megaupload.

In the wake of Judge Kessler’s recent decision, RICO arguably doesn’t have extraterritorial effect in a criminal case. As for criminal copyright infringement, there was one prominent case in which an Australian hacker pleaded guilty after he was extradited to the U.S. – but that occurred in 2007, before Morrison was decided. The criminal copyright infringement statute itself doesn’t expressly mention whether it should apply to overseas conduct.

The prosecutors handling the case against Megaupload seem well aware of Judge Kessler’s view that extraterritorial effect should be given only to statutes relating to crimes against the government: they charged Megaupload’s leaders with conspiring to defraud the U.S., the argument being that the government issues copyrights, and that, as a result, the government (along with the copyright holders) is a victim of any infringements of those copyrights. The DOJ’s manual for federal prosecutors notes that criminal copyright infringement can be prosecuted under the law against defrauding the government, which doesn’t mention copyright infringement at all.

If the DOJ can survive a Morrison challenge to its case against Megaupload, the Obama Administration would be able to back up its tough talk about cracking down on online piracy, without having to resort to the type of censorship-promoting legislation that offends the sensibilities of the president’s liberal voting base.

And the indictment against Megaupload may very well be the tip of an iceberg. As NYLS resident IP law guru Professor James Grimmelman tweeted last night, the feds’ decision to go after Megaupload could mean that investigations of other overseas file-hosting sites – like Switzerland-based RapidShare – are either in the offing or already underway.

Safe to say that there’s a lot at stake here.



7 Responses

  1. John Burgess says:

    I really don’t see much of a problem in asserting jurisdiction here…

    1. Megaupload used servers based in the US;
    2. Magaupload paid reward to US citizens for uploading and views of the material;
    3. Megaupload victims included US entities holding valid US copyrights.

    These strike me as more than enough to permit a US court to hear the case(s).

  2. Austin Hoffman says:

    That’s sad…since it’s all BS…SOPA/PIPA were junk + MU arrest was unfair + I don’t think swizz he has any legal connections to MU…imo it was all fabbed up to get other celebrity endorsements.

    p.s. looks like someone is pissed – FBI vs ANONYMOUS video:

  3. Emily says:

    Really well done piece.

    Saw it on http://www.washingtonpost.com/blogs/ezra-klein/post/does-the-megaupload-takedown-prove-that-sopa-is-unnecessary/2012/01/23/gIQAi7A0KQ_blog.html

    (Washington Post’s Ezra Klein mentioned it. His piece good, too).

  4. […] as the New York Law School blog Legal As She Is Spoke (yes, that’s really its name) was the first to note, the government’s criminal copyright-infringement and racketeering counts could be in […]

  5. renee rauch says:

    fascinating and well-written piece by LASIS!

  6. […] read for today: MegaUpload Meet Morrison. More here. The media has gone wild with its coverage of Kim DotCom’s personal life, I’m only […]