In August 2021, the Czech Supreme Court issued a ruling, in which it found a provider of a file-sharing service liable for infringement of Czech laws against unfair competition. The decision takes a somewhat unorthodox approach to unfair competition, as it recognizes that particular business models benefitting from “free riding” may in themselves constitute an unlawful practice. For a European audience, it may also be interesting to learn how the court disapplied the safe harbor liability exception for hosting services and how the CJEU’s case law influenced the judgment.

The dispute

The claimant was the Czech national section of the International Federation of the Phonographic Industry (IFPI), an organization representing record labels all around the world. By its action, it sought protection against anticompetitive practices of providers of the Hellshare and Hellspy file-sharing websites. 

The challenged websites allowed users to upload, search and download an unlimited number of files. While uploading was free, the defendants generated income from user downloads. Additionally, uploaders could join the websites’ partnership program, which allowed them to earn monetary rewards for downloads by other users. This way, uploaders were incentivized to share attractive content, including unlicensed copyrighted works. To prevent the sharing of illegal content, the websites made no efforts other than a mere prohibition in the T&Cs.

Curiously, the claimant raised no claims of intellectual property infringement. Instead, it asserted that by actively rewarding users for copyright infringements, the websites’ business model was in contrast with the honest conduct of competition. This line of arguments resonated with the Supreme Court and the case was decided in favor of the IFPI.

“Free riding” as a business model

Due to the lack of EU harmonization, unfair competition laws vary across member states. In the Czech Republic, the “general unfair competition clause” under Sec. 2976 of Act No. 89/2012 Coll., the Civil Code, prohibits any conduct in business relations that conflicts with the proper conduct of competition and is capable of causing harm to other competitors or customers. In addition to the “general clause”, the Civil Code explicitly recognizes certain practices and scenarios that usually amount to unfair competition (such as misleading advertisements, bribery or abuse of trade secrets). Nonetheless, the criteria of the general clause are alone sufficient to establish an infringement. In this way, additional scenarios of unfair competition are consistently recognized by Czech courts.

In the present case, the Supreme Court held that the defendants’ business model amounted to unfair competition. The decision adds to a line of prior case law concerning unfair practices that could be described as the Czech equivalent of “passing off,”—i.e. when the get-up of goods is imitated with the intention to pass of one’s goods as those of another. Thereunder, a breach of unfair competition can be seen in the conduct, by which one competitor “free rides,” i.e. it unjustly benefits from the outputs, efforts or expenses of another and thus gains an unfair competitive advantage since it does not have to incur such costs itself. In this sense, benefitting from, and even actively promoting the sharing of, infringing content was found to be unfair “free riding” (a term used by the court itself).

The court identified two main ways in which the defendants’ websites could cause harm to competitors or customers. First, a contractual framework that rewards users based on the popularity of the content they upload, without having any measures in place to check the legality of such content, inherently incentivizes users to upload attractive content, including unlicensed content protected by intellectual property rights. In the court’s opinion, a practice that actively encourages users to act unlawfully cannot be accepted. Second, by offering on their websites copyrighted content, the defendants represent a de facto competitor among licensed content distributors. Against such distributors, the defendants derive an unfair advantage, as they do not need to incur any costs to obtain the necessary licenses.

Considering the above, the court concluded that not the sharing of unlicensed content, but the way in which the defendants provided their services—their business model—amounted to unfair competition.

What happened to safe harbor?

At this point you may be thinking: “Wait a second. Isn’t file hosting covered by the safe harbor exception under the e-Commerce Directive?” You would be right, and it was exactly for this reason that the claim had previously been dismissed by the High Court in Prague. However, on the IFPI’s appeal, that decision was overruled by the Supreme Court.

The conclusion itself is not that surprising. If the hosting provider actively encourages the sharing of illegal content, it may rarely benefit from safe harbor protection. In the terminology of the Court of Justice of the European Union (CJEU), it may be found to “play an active role of such a kind as to give it knowledge of or control over the content uploaded to its platform” (Case C-236/08, Google France SARL). Therefore, the Supreme Court potentially had the option to rule out safe harbor, based on the exception under Art. 14 (1) and (2) of the e-Commerce Directive. Yet, the Supreme Court went a level higher. Instead of assessing the defendant’s involvement in the dissemination of the illegal content, it disapplied safe harbor in its entirety.

Art. 14 of the e-Commerce Directive exempts a file-hosting service provider from liability for “the information stored at the request of a recipient of the service.” From the wording, it is clear that the exception is not all-encompassing and excludes only the primary or secondary liability for the content stored. According to the Supreme Court, this means that a file-hosting provider remains liable for other civil-law delicts, which do not arise from the provider’s liability for the infringement of exclusive rights in the stored content (such as intellectual property or personality rights). It is then irrelevant that the unlawful acts that gave rise to such delict are economically connected with the provision of the user-uploaded content.

This part of the judgment is somewhat controversial. It could easily be argued that to achieve uniform application of the e-Commerce Directive, the safe harbor exception must apply to all forms of liability related to hosted information, including liability for unfair competition. Nonetheless, the court’s position appears to be well-justified. The safe harbor is not universal and must end somewhere. While the line between, on the one hand, the secondary liability for sharing of illegal content, and on the other, the liability for the unfair way in which such sharing is facilitated, may seem rather faint, there is a difference. After all, “free riding” as a form of a dishonest business model is easily imaginable even in cases completely unrelated to content sharing.

Unfair competition, copyright and safe harbor

Arguably, the defendants’ practice also constitutes a copyright infringement. The concept of “act of communication to the public” under Art. 3 (1) of the InfoSoc Directive, allows for actions of internet intermediaries to attract primary liability for sharing of copyrighted content by their users. In the CJEU’s case law, questions of interference between the communication right and the safe harbor have often been addressed. However, even though copyright law could have potentially been used to arrive at the same results, copyright claims were never raised by the IFPI. Therefore, the court did not have a chance to address the issue.

Nonetheless, it is without doubt that the Supreme Court’s reasoning was heavily influenced by the CJEU’s case law. In fact, the judgment directly cites the most notable European cases on intermediary liability such as Stichting Brein v Ziggo, Louis Vuitton v Google France or L’Oréal v eBay, and even refers to landmark overseas judgments such as the US Viacom v YouTube case. This shows that the Czech Supreme Court was very much aware of the applicable EU law.

What is more, in formulating the conditions under which the operation of a file-sharing website may amount to unfair competition in the Czech Republic, the court reflects the criteria formulated by the CJEU in its IP infringement cases. For example, in the second part of the judgment, the court assessed whether the operation of a search tool on the websites that allows users to search through hosted content (including copyrighted works) represents an anti-competitive practice under Czech law, it was guided by Louis Vuitton v Google France when it stipulated that the answer depends on whether the provider plays an active role beyond the performance of merely technical and automated processes.

Readers acquainted with the CJEU’s case law on intermediary liability may have noticed that the CJEU took a similar approach in in its judgment in the joined cases C‑682/18 and C‑683/18, YouTube and Cyando. In this judgment (also concerning liability for user-generated content) the CJEU further interpreted the knowledge standards for the “act of communication to the public,” which gives rise to copyright infringement, and the “knowledge of or awareness of specific illegal acts” required for exempting a service from the safe harbor. Therein, the standards were approximated in such a way that virtually every provider that performs an act of communication to the public will also have knowledge of the content uploaded and will thus be exempt from the safe harbor.

Final comments

There are several important takeaways from the Supreme Court’s judgment. First, it shows that there are limits to the safe harbor exceptions under the e-Commerce Directive and that internet intermediaries still need to pay close attention to national unfair competition rules.

Second, it appears that in certain cases of liability for user-generated content, rightsholders in the Czech Republic will now be able to rely on unfair competition claims, as well as claims based on intellectual property rights. It will certainly be interesting to see how the courts will apply the doctrine alongside copyright law. However, we do not share the concerns that the new doctrine could be used to circumvent Art. 14 of the e-Commerce Directive. For the court to “pierce” the safe harbor, it is not enough to show that content is shared illegally, but rather that the business model of the provider is anti-competitive. As opposed to fairly strict intellectual property laws, Czech unfair competition law consistently recognizes that a certain degree of aggressiveness between competitors is permissible.

Third, Czech law now explicitly recognizes “free riding” as an anti-competitive practice. The potential application of this doctrine extends way beyond copyright. For example, it could be used to claim protection against practices that sometimes cannot be effectively prevented through intellectual property law, such as passing off, development of software imitations through de-compilation or even data scraping. In addition, the burden of proof is lower, since it is enough to show that a particular business model represents unfair “free riding” without the need to prove any actual damage incurred.

Finally, by comparing the judgment with the CJEU’s practice, it is possible to identify certain behaviors of file-sharing services that are recognized as unlawful, regardless of the applicable legal regime.