(Editor’s Note: Given the recent acquisition of Mendeley by Elsevier, and the prescient nature of this post written by David Crotty in October of 2010, we are republishing it today.)

Although social networking websites continue to proliferate, turning them into sustainable, revenue-generating businesses remains a difficult prospect. This process of legitimacy — becoming an actual business rather than a challenge to be faced somewhere down the line — is doubly difficult for sites based on filesharing.

Building a network based on filesharing is a quick way to gain a large population of users. People like getting things for free. The legal issues surrounding the redistribution of copyrighted material are often ignored during the network building process — the focus is on providing functionality for the user. But when the network is ready to move up to the big leagues, to start partnering with and generating revenue from deep-pocketed companies and institutions, a lack of adherence to copyright law can be a major barrier to success.

Music sharing networks are the poster children for these sorts of difficulties. Way back in the stone age of 2000, media giant Bertelsmann invested in the granddaddy of all fileswapping networks, Napster. The plan was to turn it into a legitimate subscription service that would allow users to continue swapping files, but to ensure compensation to copyright holders. But this act of lying down with infringers led to an expensive case of fleas for Bertelsmann.  They ended up having to pay out massive settlements to copyright holders due to its financial support of an illegal network. Bertelsmann gave up on their plans for Napster at that point, and its assets were sold off at auction.  Napster became a wholly different beast that merely sold files without any sharing, lost the bulk of its users to newer filesharing networks, and subsequently changed hands several times without any significant impact on the market. Bertelsmann’s legal troubles point out the danger in partnering with companies that are violating copyright law.

Contrast that with recent developments at Scribd. With some 50 million users, Scribd was long seen as the scourge of the print content industry. Last year though, Scribd announced partnerships with a series of major publishing houses, including Random House, Simon & Schuster, Workman Publishing Co., Berrett-Koehler, Thomas Nelson, and Manning Publications. The goal was to use Scribd as part of viral marketing campaigns. Shortly thereafter, ScribD opened their “Scribd Store”, which sells view and download access to documents and books.

Why was Scribd successful in taking on corporate partners where Napster failed? Ars Technica explains:

The fact that Scribd is offering the publishers this level of control over their content is part of the appeal. . . . Another part of the appeal is undoubtedly the fact that Scribd takes its potential use for copyright infringement seriously. The company hosts a copy of a legally valid DMCA takedown notice in its support section, and it provides a mechanism for users to contest these claims. Any text that is removed as a response to the takedown notice gets processed into a digital fingerprint that is then used for comparison whenever any new content is uploaded. Clearly, publishers are more likely to look more favorably on Scribd than the music labels did on Napster.

Rather than waiting for a book to be pirated, Scribd has implemented a system where copyright holders can upload copies of their material into Scribd’s reference database, and illegal material is prevented from appearing on the site. The system is far from perfect (a search today turned up some 26 copyrighted documents from my employer, prompting another round of DMCA takedown notices). But Scribd responds rapidly and is eager to work with publishers on these issues. And that seems to go a long way in transforming their image from a den of piracy to a valuable partner.

Which brings us to Mendeley, the current market leader for potential filesharing of scholarly papers and materials. Mendeley offers an excellent system for reference management for researchers, with both local desktop and online components. In many ways, they’ve taken the best aspects of programs like Papers and websites like Connotea and combined them into a powerful whole. The problem is that they’ve built filesharing into their system with little to no oversight over copyright infringement. Since Mendeley claims it has 8 million research papers uploaded to its site, if you’re a scholarly publisher, it’s likely that your copyrighted material is already hosted on their servers.

I first met with representatives from Mendeley back in late 2008, and was fairly stunned at their apparent naïveté towards copyright law and the legal precedents that had been set in cases involving music sites (particularly since one of their major backers is the founder of Last.FM). Their FAQ and terms of service at the time were clearly offering the sorts of infringement inducements that got Grokster in so much legal trouble, and after some correspondence with Victor Henning, Mendeley changed the language on these pages to better reflect copyright law and leave the company some hope of a safe harbor defense. The big problem they still haven’t resolved is the fact that all uploading and downloading takes place through the company’s servers. In the Napster case, all infringing activities ran through the company’s servers and that was the smoking gun in the determination of contributory infringement. That’s why things like BitTorrent were created, to let users connect directly to one another, leaving no guilty middleman. Mendeley not only connects users through their servers but actually hosts and redistributes the potentially infringing files.

Representatives from Mendeley have also variously made the argument that because the sharing is limited to small groups (10 at a time, though each of those 10 can share with 10 more, etc.), it falls under the rubric of fair use. Then again, if I start a website that allows you to upload Beatles’ songs and then redistribute them to just 10 other people at a time, odds are Paul MacCartney’s lawyers would be calling soon. Remember that Jammie Thomas was found liable for $1.92 million for sharing a mere 24 files one time each.  Correspondence from one of Mendeley’s founders also suggests that “fair use allows limited use of copyrighted material without requiring permission from the rights holders, such as use for scholarship or review exemption”. This is undoubtedly true, but I’m not sure it covers a third-party facilitating the exchange, and more importantly, one of the main determinants of fair use is:

The purpose and character of the use, including whether such use is of commercial nature or is for nonprofit educational purposes

This may hold for the user’s liability, but with Mendeley’s latest announcement, the nonprofit nature, along with any limits on sharing, are no longer part of the picture. They now plan to offer “premium packages”:

. . . shared collections – which are currently limited to ten people – we quickly found requests rolling in for collections of a much larger size, mainly for departments and labs. So, we will raise the number of people who can access a shared collection as part of a premium package and in turn make the limits flexible.

The announcement also notes a paid feature to increase the amount of storage space online for uploading material. You can see where Mendeley wants to go with this. Universities and other institutions are struggling with setting up and maintaining repositories for the distribution of publications from their faculty. That makes great sense, and Mendeley could be an ideal outsourcing partner for such services. But frankly, I can’t see any major institution taking the risk of being tied to a service that’s so ripe for a costly lawsuit. I’ve been surprised that no publisher has challenged the legality of what Mendeley has done in the past, particularly commercial houses that have products directly competing with Mendeley (MacMillan owns Connotea and Elsevier owns 2Collab). Perhaps the lawyers are just waiting for the involvement of someone with deeper pockets (like a university with a large endowment) to make the lawsuit more rewarding.

If University X signs up with Mendeley for their unlimited uploading and filesharing service, what’s to stop the students from using it as a new Napster? Clearly nothing — as a test, I set up two Mendeley accounts yesterday, uploaded an mp3 song file to one (I used a Creative Commons licensed file to avoid breaking the law myself) and then shared it with the other account. If you’re Harvard, given the size of your endowment, do you really want to set yourself up to be Jammie Thomas or Joel Tenenbaum on a massive scale?

The good news for Mendeley is that given the nature of their system, which is based on automated identification of uploaded files and compiling detailed statistical reports on user activity, it should be within their power to do a reasonably good job of screening out infringing material. As they grow from a revenue-less startup to a legitimate business, it will be interesting to see if their policies toward redistributing infringing materials change to fit their new role. The “information wants to be free” crowd has served them well for building a following and getting noticed, but it’s not a community well-known for generating revenue.

There’s huge potential here for partnerships with publishers (I have several projects I’d love to propose) and major research institutions, but these are going to require reasonable activities on Mendeley’s part to obey copyright laws and safeguard those partners from liability. It’s not as sexy a path as being a Jolly Roger-hoisting rebel, but no one ever said that growing up was easy.