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U.S. says MegaUpload's hosting service is no innocent bystander

Carpathia Hosting says it shouldn't have to heft costs of preserving MegaUpload's data, but U.S. attorney suggests managers should have predicted that partnering with a pirate site would be expensive.

MegaUpload's U.S. legal team leaves courts following a hearing about preserving the company's data servers. From left to right: Jared Smith, William Burck, Derrick Shaffer and Ira Rothken. Greg Sandoval/CNET

ALEXANDRIA, Va.--Managers at Carpathia Hosting should have known their MegaUpload gravy train would roar off the tracks one day, according to a lawyer representing the U.S. government.

Since January, when the U.S. Department of Justice filed criminal copyright charges against MegaUpload, one of the world's most popular cyberlocker services, the private firm that hosted MegaUpload's servers has preserved user data on its own dime. During a hearing yesterday in U.S. District Court to decide what to do with MegaUpload's user data, Carpathia's lawyer told the judge that the federal government should pick up the tab for storing the information.

Jay Prabhu, the lawyer representing the U.S. Attorney's office, said Carpathia's problems were not caused by the government. His message to the court was that if the cost of doing business with MegaUpload has gone up, Carpathia's added expenses shouldn't be thrust onto taxpayers. Later, Prabhu called attention to Carpathia's relationship with the cyberlocker service. And for the first time in the case it was suggested that someone other than MegaUpload's managers may bear some responsibility for the piracy that allegedly occurred at the site.

Carpathia's financial interests were the reason for the hearing. After the government shut down MegaUpload and seized the company's assets, Carpathia stopped getting paid. Typically in these situations, Carpathia will delete the data and put the servers to work elsewhere. Numerous parties including the Motion Picture Association of America, the Electronic Frontier Foundation, and MegaUpload's lawyers all have an interest in what becomes of the billions of digital files belonging to MegaUpload's former users.

Like Carpathia, most of the parties told U.S. District Judge Liam O'Grady they believe the government should pay for the preservation of the servers. U.S. officials disagree. O'Grady decided to send them all back to the negotiating table to try to work out a compromise.

Before he did that, O'Grady told Carpathia lawyers he had "sympathy" for the company's situation. That's when Prabhu cut loose on Carpathia.

MegaUpload was boon for Carpathia
Prabhu disputed the notion that the hosting service is just an innocent third party left holding the bag. He attacked the company's claims that managers were caught unaware by the charges leveled against MegaUpload.

Prabhu outlined how prior to the January raid on MegaUpload, Carpathia had received subpoenas regarding the company's alleged copyright violations from the government as well those from civil complaints filed against MegaUpload. He told the judge that servicing MegaUpload helped Carpathia generate $35 million. The attorney also said he had reason to believe that Carpathia may be a target for civil litigation.

He did not accuse Carpathia of violating any criminal laws and did not identify where a civil complaint might originate.

It's not hard to figure out what that origin might be. In previous court filings in this case, the major Hollywood film studios said they are considering civil charges against MegaUpload and other unnamed companies. A spokesman for the Motion Picture Association of America, the studios' trade group, declined to comment.

A spokeswoman for Carpathia issued a statement saying the company is looking forward to working with the other parties to resolve the server issue but did not respond to Prabhu's statements. A spokesman for the U.S. Attorney's office also declined to comment.

Anyone who may try to accuse Carpathia of having some kind of culpability in any copyright-infringing behavior at MegaUpload is likely taking on a tough case. The Digital Millennium Copyright Act (DMCA) was tailor-made for third-party service providers like Carpathia. The act's Safe Harbor provision is designed to shield these companies from liability for the copyright violations committed by users.

Nonetheless, the relationship between MegaUpload and Carpathia was certainly unique.

Sailing the digital 'Somalian coastline'
MegaUpload put Carpathia on the map. The company was largely unheard of in 2009, when researchers from the University of Michigan and Arbor Networks reported they had discovered something unusual.

For the month of July that year, 0.6 percent of all Internet traffic was delivered by a single little-known Web hosting service: Carpathia.

To give you an idea of how much that is, the number was twice the amount of bandwidth consumed by Facebook during the period and nearly half the traffic to all of Microsoft's Web sites, including Bing, Forbes noted in a story from November that year.

The researchers traced the massive traffic wave to a deal Carpathia had struck a year earlier to service MegaUpload and the other sites operated by founder Kim DotCom, including Megarotica, Megavideo, and Megaclick.

Forbes' reporter Andy Greenberg wrote that in the fight against online piracy, the sites had "become the digital equivalent of the Somalian coastline."