WWW- [metnews.com]- Banks that process credit card payments on behalf of Web sites that infringe copyrights and trademarks cannot be held liable for doing so, the Ninth U.S. Circuit Court of Appeals ruled Tuesday.

“[T]hat Defendants have the power to undermine the commercial viability of infringement does not demonstrate that the Defendants materially contribute to that infringement,” Judge Milan D. Smith Jr. wrote for a divided panel. Smith was joined by Judge Stephen Reinhardt, while Judge Alex Kozinski vigorously dissented.

The panel affirmed Judge James Ware’s dismissal of an action by Perfect 10, Inc. against the Visa and MasterCard networks. Ware, of the Northern District of California, ruled that the plaintiff failed to state a cause of action under federal or state law.

The plaintiff is the publisher of PERFECT10 magazine and the operator of a related subscription-based Web site, both of which feature copyrighted nude images of female models. The company has accused numerous foreign-based Internet sites of stealing its images, altering them, and selling them illegally online.

Google Ruling

The company won a Ninth Circuit ruling in May that Google, Inc. “could be held contributorily liable if it had knowledge that infringing Perfect 10 images were available using its search engine, could take simple measures to prevent further damage to Perfect 10’s copyrighted works, and failed to take such steps.”

But Smith drew the line against the claim that the credit card companies could be held liable on a similar theory.

He distinguished cases holding that the operator of an electronic file sharing system, such as Napster, or the distributor of similar software, such as Grokster, could be held liable for assisting users in exchanging copyrighted music, and that a swap meet operator was potentially responsible for the sale of pirated works by its vendors.

“[M]aking it fast and easy” to infringe a copyright, Smith explained, is different from “mak[ing] it easier for infringement to be profitable.” In the swap meet case, for example, the defendant knowingly provided the “site and facilities” where the sales of copyrighted works took place illegally, the judge noted.

He elaborated:

“Defendants do not create, operate, advertise, or otherwise promote these [infringing] websites. They do not operate the servers on which they reside. Unlike the Napster (and Grokster) defendants, they do not provide users the tools to locate infringing material, nor does any infringing material ever reside on or pass through any network or computer Defendants operate. Defendants merely provide a method of payment, not a ‘site’ or ‘facility’ of infringement.”

Kozinski Dissent

Kozinski argued in dissent that the distinction drawn by the majority was meaningless.

“Defendants participate in every credit card sale of pirated images; the images are delivered to the buyer only after defendants approve the transaction and process the payment,” he wrote. “This is not just an economic incentive for infringement; it’s an essential step in the infringement process.”

While “it would certainly be much easier for us if plaintiff were suing the Stolen Content Websites,” such targets “are sometimes too ubiquitous, too small, or too difficult to find,” although Perfect 10 has sued a few of them, Kozinski wrote.

“The weak link in the pirates’ nefarious scheme is their need to get paid; for this they must use the services of legitimate financial institutions,” he wrote. “If plaintiff’s allegations are to be believed, the financial institutions (defendants here) collect billions for sellers of stolen merchandise; in a very real sense, they profit from making piracy possible. I can see no reason they should not be held responsible.”

The case was argued in the Ninth Circuit by Los Angeles attorney Howard E. King of King, Holmes, Paterno & Berliner for the plaintiff, with Stephen D. Rothschild of the same firm, Jeffrey N. Mausner of Berman, Mausner & Resser, and Daniel J. Cooper working on the briefs.

Andrew P. Bridges of Winston & Strawn’s San Francisco office argued for the defendants.

The case is Perfect 10, Inc. v. Visa International Service Association, 05-15170.