File Storage Shutdown: Competing Interests of "Innocent" Third Parties (Part I)

Background

            On January 19, 2012 the file storage company Megaupload got its monetary assets and domain names seized, and its servers searched.[1]  The United States accused Megaupload of a “Mega Conspiracy” that encouraged users to upload copyrighted media that would then attract visitors to its website and thus earn profits for both the copyright infringers and Megaupload.[2] 

According to the United States, Megaupload had two sources of revenue: premium subscriptions and advertising revenue.  The former brought in $150 million and the latter $25 million.  Premium subscriptions gave users a faster experience of the website in uploading, downloading, and streaming material. Advertising revenue abounded due to the volume of visitors to the website.[3]  Furthermore, uploaders of popular pirated copyrighted material were rewarded with cash payments.[4] 

The founder of Megaupload, Kim Dotcom, and several of the company’s top employees were arrested around the world.  The shutdown of Megaupload commenced the process to extradite Megaupload employees to the United States.[5]  These legal proceedings would be no easy matter as Kim Dotcom continues to fight extradition in New Zealand courts to this day.[6]  

Megaupload.com was not the only one affected by this litigation, the various users of Megaupload and the company which hosted Megaupload’s servers, Carpathia Hosting, became third parties with a financial stake in the litigation.  Carpathia hosted 25 petabytes (25 million gigabytes of data) from 1,103 computer servers.[7]  The users of Megaupload uploaded to the site a combination of legal and illegal works.  Users who uploaded copyrighted works and then lost them had little justification for compensation as they broke the law by distributing copyrighted material.  Those who uploaded their personal, non-infringing files could potentially claim that they were deprived of their property when the website shutdown. 

Carpathia Hosting

Carpathia Hosting, responsible for hosting all elements of Megaupload, was stuck with the website’s inactive data on its servers.  Carpathia had little use for the data itself, since they did not have access to it and were an innocent third party burdened with the daily expense of preserving the servers.  In March 2012 Carpathia moved for a protective order that would either:

…require the parties to the criminal case to take possession of the Mega Servers…in exchange for reasonable compensation… [or] reimburse Carpathia…for the cost of transport and storage of the Mega Servers….or allowed Carpathia…to delete the data…after a…reasonable period of access for selective copying under an approved procedure.[8]

If the court found that such conditions were appropriate, Carpathia would receive compensation for the servers.  Megaupload claimed that the data on the server was integral to its defense, thus they wanted the data to be preserved.[9]  Additionally, legitimate users of Megaupload could potentially want to download their files for safe-keeping.  On January 27, 2012, the United States ended its search of Carpathia’s servers.  The search started eight days earlier on January 19th.   After the United States completed its search of Megaupload’s servers, they informed Carpathia that they could start deleting the data starting February 2, 2012.[10]  Carpathia did not delete the data, however, due to concerns that Megaupload wanted the data for its defense and various users wanted to eventually download their data for safekeeping.  Thus, the hosting company was stuck with the cost of over $9,000 dollars a day to hold onto the data.[11] On March 20th the parties failed to reach an agreement on how to handle the data on Carpathia’s servers, this drew the attention of at least one former user: Kyle Goodwin.[12]

Kyle Goodwin

Goodwin, owner of OhioSportsNet, with the help of the non-profit Electronic Frontier Foundation (EFF), attempted to create a protocol for which innocent file owners can claim their files in the event the Federal Government shuts down a website.[13]  He himself used Megaupload’s premium service to host backup files for his business: films of high school sports games.[14]  His hard-drive crashed right before Megaupload was shut-down and he did not have the opportunity to retrieve his files from his Megaupload account.[15]

Kyle Goodwin claimed that OhioSportsNet was deprived from doing business since he could not use the footage stored on Megaupload to create highlight reels for his customers.[16]  In justification for this stance, Goodwin argued that the Racketeer Influenced and Corrupt Organizations Act (RICO) Act, authorizes seizure of property derived only from racketeering activity 18 U.S.C. § 1963 (a)(3).[17]  As a means for recovery Goodwin suggested that he only has to establish ownership as an innocent third party for the return of his property since criminal forfeiture intends to implicate only criminal defendants, citing Chaim v. U.S., 692 F. Supp. 2d 461, 470-471 (D.N.J. 2010).[18]  Goodwin also cited Rule 41(g) of the Federal Rules of Criminal Procedure (hereinafter known as 41(g)), which states a person subjected to an unlawful search and seizure or deprivation of property may request its return.[19] 

            These statutes and case law, if Goodwin’s case was in a more physical realm, would have been more tangible.  Goodwin, himself admitted that his: “…data was not forfeited or potentially even seized, in the traditional sense…”.[20]  His data was rendered inaccessible by a Federal Government search for copyrighted material.  Despite this unorthodoxy, Goodwin asserted, citing Presley v. City of Charlottesville, 464 F. 3d 480, 487 (4th Cir., 2006) that: “…an individual’s Fourth Amendment right to unreasonable search and seizure is implicated when there “is some meaningful interference with an individual’s possessory interests in that property”.[21] 

Megaupload’s seizure caused Carpathia to completely shut down its servers.  Thus, users lost access to their infringing and non-infringing data.  Due to the seizure of Megaupload’s domain names, Carpathia could not simply turn the servers back on for public-access after the Government executed the search.  In addition, Megaupload’s monetary assets were seized, so Carpathia could not be compensated for continued hosting of the Megaupload website. 


[1] Megan Geuss, and David Daw. "File-Sharing Site MegaUpload Indicted for Internet Piracy, Shut Down by US." PC World. January 19, 2012. Accessed March 1, 2016.

[2] Indictiment, USA v. Dotcom et al, No. 1:12-cr-00003, (E.D. Va. Jan 05, 2012), ECF No. 1, at 2-3.

[3] Indictiment, USA v. Dotcom et al, No. 1:12-cr-00003, (E.D. Va. Jan 05, 2012), ECF No. 1, at 3.

[4] Indictiment, USA v. Dotcom et al, No. 1:12-cr-00003, (E.D. Va. Jan 05, 2012), ECF No. 1, at 3-4.

[5] Joe Mullin. "US Gov’t: Kim Dotcom Paid Pirates $3M for Movies, Should Be Extradited." Ars Technica. September 28, 2015. Accessed March 11, 2016.

[6] Andrew Blake. "Megaupload Gets Civil Suits Postponed Until 2016 as Extradition Hearing Continues." The Washington Times. October 1, 2015. Accessed March 24, 2016.

[7]Memorandum in Support for Protective Order, USA v. Dotcom et al, No. 1:12-cr-00003, (E.D. Va. Mar 20, 2012), ECF No. 39, at 1.

[8] Motion for Protective Order, USA v. Dotcom et al, No. 1:12-cr-00003, (E.D. Va. Aug 11, 2015), ECF No. 218, at 1.

[9] Hearing Transcript, USA v. Dotcom et al, No. 1:12-cr-00003, (E.D. Va. Apr 13, 2012), ECF No. 84, at 12.

[10] Motion for Protective Order, USA v. Dotcom et al, No. 1:12-cr-00003, (E.D. Va. Mar 30, 2012), ECF No. 51, at 5.

[11]Motion for Protective Order, USA v. Dotcom et al, No. 1:12-cr-00003, (E.D. Va. Mar 30, 2012), ECF No. 51, at 5.

[12] Memorandum in Support, USA v. Dotcom et al, No. 1:12-cr-00003, (E.D. Va. May 25, 2012), ECF No. 91, at 3.

[13] Memorandum in Support, USA v. Dotcom et al, No. 1:12-cr-00003, (E.D. Va. May 25, 2012), ECF No. 91, at 2.

[14] Motion for Protective Order, USA v. Dotcom et al, No. 1:12-cr-00003, (E.D. Va. Mar 30, 2012), ECF No. 51, at 3.

[15] Motion for Protective Order, USA v. Dotcom et al, No. 1:12-cr-00003, (E.D. Va. Mar 30, 2012), ECF No. 51, at 4.

[16] Motion for Protective Order, USA v. Dotcom et al, No. 1:12-cr-00003, (E.D. Va. Mar 30, 2012), ECF No. 51, at 6.

[17] Motion for Protective Order, USA v. Dotcom et al, No. 1:12-cr-00003, (E.D. Va. Mar 30, 2012), ECF No. 51, at 7.

[18] Motion for Protective Order, USA v. Dotcom et al, No. 1:12-cr-00003, (E.D. Va. Mar 30, 2012), ECF No. 51, at 8.

[19] Motion for Protective Order, USA v. Dotcom et al, No. 1:12-cr-00003, (E.D. Va. Mar 30, 2012), ECF No. 51, at 8.

[20] Motion for Protective Order, USA v. Dotcom et al, No. 1:12-cr-00003, (E.D. Va. Mar 30, 2012), ECF No. 51, at 9.

[21] Motion for Protective Order, USA v. Dotcom et al, No. 1:12-cr-00003, (E.D. Va. Mar 30, 2012), ECF No. 51, at 9.