http://www.businessweek.com/articles/2013-05-30/prenda-law-the-porn-copyright-trolls

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Prenda Law, the Porn Copyright Trolls


Prenda Law, the Porn Copyright Trolls

Tony Smith had a porn problem. A 27-year-old nursing student in Collinsville, Ill., Smith was listening to music and doing homework one night last August when he heard a knock on his apartment door. He opened it and an imposing-looking man with a flashlight handed him a lawsuit and his business card. A name was written in pen on the back. “Give this guy a call, he can help you get through this,” the man told Smith. “He’s looking out for people like you.” Smith turned it over and read the name: John Steele.

According to the complaint, Smith was accused of conspiring with 6,600 anonymous people to hack into computers owned by Lightspeed Media, an Arizona adult-entertainment company, and steal its porn. Before serving him with the lawsuit, Smith recalled, Chicago’s Prenda Law firm had mailed him threatening letters for three months. “They always said that if I went ahead and wrote a check for $4,000, they’d drop it,” Smith says. Because he didn’t know how to hack into anything and didn’t have any illegally downloaded porn on his computer, he’d thought it was a scam and ignored it.

Assuming Steele was a defense attorney, Smith called him. He says Steele explained the allegations and offered to help. Steele asked about Smith’s job (school made full-time work impossible), his roommates (none), and his computer (an old hand-me-down). The two talked for several minutes before Steele mentioned that he worked with Prenda, helping on a lot of its cases. Smith became suspicious and hung up. After an hour of frantic Googling, he determined that Steele “didn’t just work with Prenda, he ran Prenda,” he says. “That’s when I knew, I’m never talking to this guy again.”

Since 2010, Prenda Law, under various names, has initiated hundreds of copyright infringement lawsuits in courts across the country. Steele and his partner, Paul Hansmeier, are said to oversee a team of lawyers that has threatened to sue more than 25,000 people for illegally downloading porn. In every case, it appears, the lawyers try to settle early for a few thousand dollars.

Prenda’s methods exhibit a dark understanding of copyright law and the Internet, as detailed in hundreds of court documents and by the few defendants brave enough to fight back. Typically, Prenda starts by filing preliminary lawsuits against John Does identified only by their IP address, the number assigned to every computer with an Internet connection. Then it asks judges to compel Internet service providers (ISPs) such as Comcast (CMCSA) and AT&T (T) to surrender the names of those customers. Next, Prenda says it will sue those people unless they pay to settle the claims. When it does name someone in a suit, Prenda usually posts his name—defendants are almost always men—on its website, along with a link to the lawsuit. If a spouse or potential employer Googles the defendant, they’ll learn he’s been accused of stealing salacious movies such as Sexual Obsession and Shemale Yum.

In a 2012 Forbes interview, Steele said these suits had earned him “more than a few million” in settlement fees. The magazine estimated $15 million. Yet Steele and Prenda have never won a single one of these cases on its merits, according to Morgan Pietz, a Los Angeles copyright lawyer who’s fighting Prenda in court. “I’ve read briefs that say about 30 percent of people are misidentified,” says Jonathan Tappan, a Michigan attorney who worked on some of the cases. Even for the innocent, settlement is the easiest way out. Most people don’t want to be named in federal lawsuits, especially ones involving porn. Prenda’s settlement offers are often less than the cost of hiring a lawyer. “I tell people right off the bat that it’s possible they may be able to settle for less money than it costs to retain me,” Pietz says. “In most cases, there’s no pot of gold at the end of the rainbow for people who stick up for themselves.”

What Smith didn’t know last summer is that Prenda’s innovative business plan was nearing the end of its lucrative run. Some of its lawyers are suspected of buying copyrights to porn films and then secretly suing on their own behalf, without disclosing that information to the court. They’ve been accused of fraud, attorney misconduct, and stealing at least one person’s identity to obscure the scheme. A California court is working to unravel the multistate plot and figure out how Smith and 25,000 others got caught in this mess. “I’m confused as all get-up,” Smith says. “I don’t know why they went after me.”
 
 
Steele, 42, declined to be interviewed for this story. Hansmeier did not respond to inquiries; neither did most of the lawyers who worked for Prenda. From previously published interviews, court documents, and websites that track copyright infringement lawsuits, Steele emerges as a headstrong entrepreneur. A tall, handsome, broad-shouldered man who dresses in flashy suits and bold ties. Acquaintances describe him as confident and prone to brash remarks that get him into trouble. He grew up in Minnesota and spent his early career running a chain of Florida vocational schools, then enrolled in the University of Minnesota Law School, graduating in 2006. There he met a quiet, cerebral kid—Hansmeier, now 32—with a knack for computing. In Chicago he opened Steele Law Firm, specializing in divorce; Hansmeier joined a small firm in Minnesota.

They soon turned their attention toward copyright law and the Internet, enticed by the possibility of massive, lucrative suits, according to clients. Starting in 2003, the Recording Industry Association of America sued an estimated 35,000 people for illegally downloading music on peer-to-peer file-sharing programs such as Grokster and Kazaa. In one case, a court ordered a Minnesota mother to pay $222,000 for downloading songs by artists such as Guns N’ Roses and Gloria Estefan. Most people settled out of court, but the cases weren’t worth the trouble for the RIAA—they triggered an avalanche of negative coverage—and it hasn’t sued anyone since 2008.

Still, settlement fees looked like easy money and soon inspired entertainment companies to fish for downloaders to sue, a practice known as copyright trolling. In 2010 a Hollywood production company, Voltage Pictures, filed a lawsuit against what would eventually grow to 24,500 John Does for downloading its film The Hurt Locker over BitTorrent. (The file-sharing service, whose 170 million users account for an estimated 11 percent of all Internet traffic, has long been a favorite tool for digital pirates.) In an interview with the Hollywood Reporter, one of Voltage’s lawyers said his aim was to create a new “revenue stream.”

Steele and Hansmeier knew that according to the 1998 Digital Millennium Copyright Act, ISPs are required to turn over the personal information of subscribers suspected of wrongdoing. While it’s not Comcast’s fault if you download Game of Thrones, the cable provider can be forced to rat you out. The lawyers would focus on copyright infringement committed through BitTorrent. And since pornography was both widespread and taboo, they’d never run out of defendants willing to pay their way out of trouble. “John had the ambition, and Paul had the computer expertise,” says Daniel Voelker, a Chicago litigation attorney who knows Steele. All they needed were clients, which they found at the most obvious place in the world: Las Vegas porn conventions.

One was Steve Jones, owner of Lightspeed Media. He introduced them to his friend Paul Pilcher, who runs a six-employee pornography company in Phoenix called Hard Drive Productions. His main product is Amateur Allure, a subscription service he likens to a hard-core version of Playboy. A decade ago, Amateur Allure made $2.8 million a year, Pilcher says, but digital piracy has since cut his revenue by 60 percent. He hoped the lawyers could help him recoup his money. Pilcher says Steele and Hansmeier described their work to him as a “reverse class action,” where one company would go after thousands of people, and offered him a 50-50 split of the proceeds. He agreed.

Steele Hansmeier PLLC filed its first copyright infringement cases, on behalf of Lightspeed, Hard Drive, and another company, on Sept. 2, 2010. In the beginning, Steele worked the cases, successfully acquiring the identities behind 1,200 IP addresses that had been downloading the companies’ porn on BitTorrent, as detected by an Internet piracy monitoring company managed by Hansmeier. It was a virtuous system in which one lawyer found people on BitTorrent while the other lawyer sued them.

The money started rolling in. “They would send me a check for, let’s say, $35,000, for a month,” Pilcher says. “They’d be pounding their chest and jumping up and down, thinking they were the greatest in the world.” Over a year and a half, Steele and Hansmeier filed a total of 65 suits on behalf of Hard Drive against 4,760 people, according to court documents. Pilcher earned just under $200,000, he says, but he never knew what was happening with the suits, how many there were, or who exactly his company was suing. “Getting information out of [Steele and Hansmeier] was honestly kind of painful,” he says. “They claimed they didn’t want me to have records of specific things in case something happened.”

Eventually, judges started asking questions. Why was Hard Drive, an Arizona company, filing dozens of cases in Illinois? Could they lump 1,000 people who lived all over the country into one lawsuit? In many federal cases, judges decided they could not. One Illinois judge threw out a suit against 300 John Does, citing “Steele’s effort to shoot first and identify his targets later.” When a later case was randomly assigned to the same judge, Steele dismissed it himself. “Whenever they started to run into judicial opposition, they’d move on to the next court,” says attorney Jason Sweet, founding partner at Booth Sweet in Cambridge, Mass., who represents a number of Prenda defendants, including Smith, the nursing student.

Steele Hansmeier didn’t need to win cases; it just needed to get people’s names. And at that it was incredibly successful. As its client list grew, Steele adopted the nickname “the Pirate Slayer,” and in spring 2011 the firm hired other attorneys—many from Craigslist—to file hundreds of lawsuits in multiple states. Their biggest recruit was Paul Duffy, a Chicago commercial litigation specialist, who came on board in September 2011. Duffy would not comment for this article.

In November of that year, the firm filed a notice to change its name to Prenda Law. Steele and Hansmeier have repeatedly declared in court that the two firms are separate and that Steele Hansmeier was dissolved. Steele has said he has “no ownership interest” and that Duffy is the founding partner and principal counsel of Prenda. Indeed, Duffy took over for Steele in many of their cases. When Steele represented Lightspeed in Smith’s case, he appeared on behalf of Prenda Law. Pilcher, who was represented by both firms, refers to Steele and Hansmeier as the chiefs of Prenda.

In early 2012, Hard Drive was sued twice for harassing plaintiffs to settle claims. Prenda took care of everything—Pilcher didn’t even have to show up in court—but he started to wonder what his lawyers were up to. “I got very uncomfortable feelings from them,” he says. “But I figured, Well, if there are judges involved, and they’re ruling for us, and money is coming in, then it must be OK.”
 
 
Pietz, the Los Angeles attorney, has a reputation for winning cases for accused copyright violators. He often defends clients against a California pornography company called Malibu Media, getting judges to toss some of its lawsuits or deny its requests for IP address owners. “I had read what I’d style as rumors about Prenda’s purported shady dealings,” he says. When he got a call last November from a man being sued by a company Prenda represented, Pietz immediately took the case. He started by reviewing the firm’s earlier lawsuits to see how it operated. “Then three things happened simultaneously,” Pietz says. “That’s what made the light bulb go off.”

First there was a bizarre court hearing in Tampa on Nov. 27, in which one of Prenda’s employees, Mark Lutz, identified himself as a representative for the pornographer, SunLust Pictures. According to several defendants, Lutz frequently called to follow up about settlement offers from Prenda. During the hearing, he kept whispering to Steele, who’d shown up to watch the proceedings. When the judge asked Steele to identify himself, he said, “I no longer actively practice law.”

“John Steele says he’s just an interested member of the public?” Pietz asks. “That was the first thing I started to wonder about.” Pietz looked into Ingenuity 13, the company suing his client. Along with another Prenda client, AF Holdings, it turned out to be an offshore company based in St. Kitts and Nevis, a notorious privacy haven. Pietz had trouble tracing where Ingenuity 13’s copyrights had originated or who owned the company. The level of obscurity, he says, suggested that somebody had something to hide. Then Pietz stumbled onto a document in a Minnesota Prenda suit that made him realize these were more than small-time copyright trolls.

A man named Alan Cooper filed a notice with the court claiming his identity had been stolen. For the past six years, Cooper had worked as a caretaker on Steele’s Minnesota vacation property. Recently he’d discovered that his signature appeared on documents as the manager or owner of two of Prenda’s clients, Ingenuity 13 and AF Holdings. “Perhaps the CEO of AF Holdings has the same name as my client,” Cooper’s lawyer wrote, but “we have substantial information that would indicate that this is not a mere coincidence.” After Cooper came forward, Steele threatened to sue him. “Your life is going to get really complicated,” he said in a voice mail on Cooper’s phone that was played in court. Pietz was astonished. “If you combine the hearing in Florida—where Mark Lutz holds himself out to be the client—and you have Cooper appearing as the straw man, and then this mysterious Nevis entity, it becomes very clear that something is happening,” he says. He didn’t need to defend his client against Prenda; he needed to go after Prenda itself.

When Pietz revealed Cooper’s accusations, U.S. District Judge Otis Wright II, who’d been assigned to 45 cases Prenda had recently filed in Los Angeles on behalf of clients, demanded to know if they were true. Prenda tried to get Wright removed from the case and sued Cooper and his lawyer for defamation. The firm didn’t explain the signature and dismissed most of its Ingenuity 13 and AF Holdings suits across the country. When Hansmeier was deposed in a San Francisco suit, he offered a baffling, seven-hour explanation of the company and its dealings. AF Holdings didn’t make porn: Its business was buying copyrights to existing films to sue people who download them without permission. All of AF Holdings’ money was funneled through Prenda, he said, and Lutz was in charge. (In an e-mail, Lutz said AF Holdings and Ingenuity 13 are owned by trusts that he controls.)

Meanwhile, Pietz put together an account of Prenda’s history, detailing mysterious signatures, company addresses that appeared to belong to Steele’s family members, and one entity that appeared to be run by a friend of Hansmeier.

With Judge Wright threatening imprisonment, Steele, Hansmeier, and Duffy showed up in court on April 2. Wright was no longer concerned with the case in front of him; he wanted to get to the bottom of Prenda Law. A number of people who’d been sued by Prenda came to watch; they’d never seen their accusers in the flesh. Adam Sekora, an IT developer sued by Lightspeed Media, flew in from Phoenix. “These people made my life hell,” he said. The showdown Sekora had hoped for never quite materialized: The lawyers invoked the Fifth Amendment and refused to talk. But a few weeks later, Wright issued the rebuke that Sekora and thousands of Prenda’s other targets had been waiting for. In a court order that opened with a quote from Star Trek II: The Wrath of Khan, Wright slammed Prenda for “boldly prob[ing] the outskirts of the law” with its “web of disinformation,” and its practice of making statements that “have varied from feigned ignorance to misstatements to outright lies.” He found that the firm was creating shell companies and using forged copyright assignments to sue people. Then he turned the firm over to the U.S. Department of Justice, which may lead to a criminal investigation. In his deposition, Hansmeier had admitted that AF Holdings had never paid any taxes; Wright also promised to alert the Internal Revenue Service.

Wright ordered the firm to pay $81,300 in attorneys’ fees and penalties. (This includes $76,000 owed to Pietz that he says hasn’t been paid.) That’s a pittance compared with what Prenda has likely earned through its settlements, but the legal precedent may allow thousands of defendants to recoup money they spent on lawyers. Smith was one of the defendants awaiting the results of the California case. After his phone call with Steele, he’d hired Sweet and fought Prenda for seven months before the firm dismissed his case, leaving him on the hook for $70,000 in attorney fees he’s asked the court to make Prenda pay. “I told my lawyer that I can’t actually pay him,” he says. “But if he wants to go after Prenda for his money, I’m ready to fight.” Sweet has done just that.

The prospect of thousands of other people doing the same, or worse, terrifies Pilcher, although his Hard Drive Productions stopped working with Prenda last fall. “If these guys fold, I don’t know if I’ll have people coming out of the woodwork to sue or countersue,” he says. “I’m obviously legally exposed.” Prenda still denies any wrongdoing; the firm, Steele, and Hansmeier have appealed Wright’s sanctions. “There are hundreds of problems with this order in my view,” Steele told the technology blog ArsTechnica in May. “We think a lot of the assumptions made are inaccurate and not based on any evidence.” Lutz pointed out in an e-mail that the order “is the first sanction ever entered against any of the attorneys or law firms in this case that I know of.”

Prenda has since undergone another name change: It’s now the Anti-Piracy Law Group. Duffy is, again, in charge. The firm has dismissed nearly all of its federal cases but is still pursuing litigation in state courts, where there’s no centralized database and the paper trail is harder to follow. One judge in St. Clair County, Ill.—the same court in which Smith’s case originated—recently allowed the firm to subpoena more than 300 ISPs for information on an unspecified number of people.

Duffy is working this new St. Clair case. His client, a subsidiary of Livewire Holdings, is owned by Lutz. It’s also, as it happens, Steele and Hansmeier’s new employer. Steele says he works on the business side of Livewire, buying the rights to new films and attending shoots “to see various scenes” of brand-new adult content, according to ArsTechnica. He declined to name the films, but they may soon be on the Internet, just waiting for someone to download them.

Suddath is a staff writer for Bloomberg Businessweek.

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