Did Cox Communications Just Do the Dirty to Shareholders?

Last week Cox Communications lost its DMCA “safe harbor” defense against songwriters in BMG Rights Management’s lawsuit against Cox for failing to maintain a repeat infringer policy in Cox’s ISP business.  It has always seemed pretty obvious that an ISP running a “whack a mole” business requiring songwriters and artists to send repeated DMCA notices shouldn’t get the protection of the safe harbor if the law was working the way it should.  Finally a U.S. federal judge things so, too.

As we are often told by Big Tech, the DMCA safe harbors were a negotiated balance, a “grand bargain.”  What usually comes next is some spin that would have you believe that the “notice and takedown” operates as a kind of “tag you’re it” functionality that allows certain anointed ones to get away with not doing the actual stealing, but providing the means for the stealing to occur.  You know, because the Internet.

But now it looks like at least Cox Communications executives might have a real problem on their hands depending on how the facts turn out in the BMG case.  Why?

As Professor Tim Wu taught us before he started working for the New York Attorney General:

If the Internet were not a bookstore, or tubes, but rather a red-light district, YouTube would best be imagined as the hotel, and Napster, well, the pimp. YouTube, like a hotel, provides space for people to do things, legal or not. It’s not doing anything illegal itself, but its visitors may be. But Napster, everyone more or less now admits, was cast as the pimp: It was mainly a means of getting illegal stuff.

To extend Professor Wu’s pimp allegory, in Cox’s case it is the ISP who is providing the means of getting illegal stuff, and Cox wants to hide behind the “grand bargain” of the DMCA in order to look less like that metaphorical pimp.  In a way, it’s actually more complex than that.  According to Cox’s insurance carrier that is suing Cox to get out of any coverage, Cox’s executives intentionally failed to implement a repeat infringer policy.  The burden of implementing that policy is what ISPs take on in return for the benefit of the safe harbor.  The “grand bargain,” remember?

This notwithstanding the fact that BMG gave Cox many opportunities to get out of the middle.  Although Cox received far fewer DMCA notices than Google has, by failing to adopt a meaningful repeat infringer policy, Professor Wu might say that Cox has pimped its way to do the opposite of what the Congress intended with the DMCA’s repeat infringer requirement.  Or that seems to be clear to Cox’s insurance carrier who ought to know.

This is the real significance of the ruling and why notice and stay down is both vital to artists and entirely consistent with the goals of Congress when drafting the DMCA.

Continuing the criminal motif, Mr. Wu’s new boss, New York Attorney General Eric T. Schneiderman, had this to say in an op-ed that could easily have been written about Cox and certainly could at least be applied to ISPs:

Regulators should not be deterred and, as a practical matter, they can’t and won’t be — we are now living in an online world, one that offers great promise but is also becoming one of the primary crime scenes of the 21st century. Major service providers cannot be allowed to treat it as a digital Wild West. The only question is how long it will take for these cybercowboys to realize that working with the sheriffs is both good business and the right thing to do.

There is, however, a new face at the table now that Cox has both lost the protection of the safe harbor and may well be denied coverage by their insurance underwriter at Lloyds of London.  That face is Cox’s stockholders.

Lloyds is already trying to get out of paying Cox’s legal bill which appears to be north of $1 million already with trial starting next week.  Why is Lloyds denying coverage?  Because Lloyds quite correctly says it won’t insure Cox for its intentional refusal to comply with the DMCA for largely the same reason that the DMCA has a repeat infringer requirement in the first place.  If you try to do it right and screw up, you can get insurance or you might be entitled to the safe harbor (and you can probably more easily get insurance if you promise to comply with the safe harbor).  You cannot insure your way out of doing something that is purposely bad behavior.

The Hollywood Reporter tell us:

According to Lloyds’ complaint filed in New York Supreme Court, Cox has been told that its insurance policy doesn’t cover the BMG claim because it “arose out of intentional and not negligent acts” and “did not arise out of acts in rendering internet services but rather Cox’s business policy and practice of ignoring and failing to forward infringement notices and refusing to terminate or block infringing customers’ accounts.”

….It’s one thing for an ISP to put up a brave front — and maybe even win some goodwill among customers by fighting those like Rightscorp — but to do so with neither safe harbor nor possibly insurance raises the risk level quite substantially. Time will tell if this is a game-changer on the piracy front.

May be–but what this means is that the individual conduct of Cox Communications executives has now put the company’s shareholders on the hook for what could be massive copyright infringement damages for failing to implement a practice that’s not much more complicated than what you would expect from a university network.

Remember when Google paid a fine of $500,000,000 of the stockholders’ money to keep its senior executive team (many of whom are insider board members) from being criminally prosecuted for violating the Controlled Substances Act?  Google stockholders sued Google’s board members for breach of fiduciary duty and a bunch of other nasty things.

The argument goes like this:  We hired you executives to comply with the law.  If you choose to operate outside of the law that is your business, but you can’t use our money to pay for your bad behavior.  Cox Communications is the 17th largest private company in America, so we would have to assume that there are some institutional investors who hold shares of Cox and who are not too pleased about the pimping part.