Judge considers hearing on improper Megaupload seizure

Customers of the file-sharing site should be treated as creditors and wait until the DOJ's copyright case is resolved, a DOJ lawyer says

A U.S. judge may hold an evidentiary hearing to determine whether the U.S. Department of Justice acted improperly in blocking Megaupload customers' access to their files when seizing the file-sharing service's domain name and servers in January.

Judge Liam O'Grady, of the U.S. District Court for the Eastern District of Virginia, also said Friday he will schedule a hearing for Megaupload's motion to dismiss the copyright-infringement charges against the site and its founder Kim Dotcom. Megaupload's lawyers filed the May 30 motion to dismiss on grounds that the DOJ lacks jurisdiction to prosecute the Hong Kong-based Megaupload.

Friday's hearing focused mostly on the petition of Kyle Goodwin, a video journalist who stored duplicates of his videos at Megaupload, to get his files back. If the DOJ seized the data "and rendered it useless, then the government can be held responsible for that, can't it?" O'Grady asked.

O'Grady told lawyers for the DOJ and Goodwin that he is considering a search-and-seizure hearing to determine if the DOJ improperly seized the files of Goodwin and other Megaupload users. O'Grady did not decide at the Friday hearing whether to move forward with a so-called rule 41 search-and-seizure hearing.

The DOJ didn't seize Goodwin's data, and for a rule 41 complaint to be justified, the DOJ would have to hold the property in question, said Andrew Peterson, an assistant U.S. attorney in the Eastern District of Virginia. The DOJ seized Megaupload's domain name and made copies of some of its servers, but Goodwin's data still resides on servers owned by Web hosting provider Carpathia Hosting, he said.

"The government does not possess the property at issue," he added.

Instead of a search-and-seizure hearing, the court should treat Goodwin and other Megaupload users as unsecured creditors who can ask for their data back when the DOJ's case against Megaupload is finished, he said.

In April, O'Grady encouraged lawyers for the DOJ, Goodwin, Megaupload and Carpathia to meet with a mediator and come to an agreement on a way Megaupload customers could recover their files. No agreement has happened.

O'Grady also asked about the contractual obligations of Megaupload to its customers. Megaupload's terms of service gave customers no warranties and told users to store data at their "sole risk," Peterson said. The TOS said Megaupload's service was available "as is and as available" and could be terminated at any time, he added.

But Goodwin's dispute isn't with Megaupload or Carpathia, said Julie Samuels, a lawyer with the Electronic Frontier Foundation representing Goodwin. It's the DOJ's seizure that cut off the access of Goodwin and potentially millions of other law-abiding Megaupload customers to their data, she said. The DOJ has frustrated efforts to return the data to its owners by objecting to a proposed transfer of the servers from Carpathia to Megaupload, she said.

There's disagreement about how many legitimate Megaupload customers there were. Megaupload has claimed 180 million customers, but the DOJ contends there were less than 67 million registered users just before the site was shut down. Less than 6 million customers ever uploaded a file to Megaupload, the DOJ contends.

Samuels noted that a New Zealand judge ruled this week that the search warrants used to seize external hard drives, laptops and phones from founder Dotcom's mansion in January were illegal.

O'Grady asked if the DOJ has prevented Goodwin from accessing his files.

"Absolutely, it has," said Abraham Sofaer, another lawyer representing Goodwin. "These warrants are highly questionable, based on any logic."

Separately on Friday, O'Grady rejected requests by Megaupload's lawyers to challenge the DOJ seizure of the company's assets, saying the request is premature. Dotcom and other defendants are challenging extradition to the U.S., and he's still considering the motion to dismiss the case, he wrote.

Friday's hearing was encouraging for Goodwin and other people who stored legal files on Megaupload, Samuels said. O'Grady "appears to be concerned" about people who stored legitimate files on the service, she said.

Nearly everyone, "except the government," understands the need for customers to recover their files, she said.

Grant Gross covers technology and telecom policy in the U.S. government for The IDG News Service. Follow Grant on Twitter at GrantGross. Grant's e-mail address is grant_gross@idg.com.

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