We will release an application for iPhone for image editing. In this application the user can upload an image that does not own the copyright and modify it. The user can distribute the output image violating the copyright. I am concerned about the liability that this application can bring to us. If there is a lawsuit for copyright infringement, the final user will not have money and they lawsuit might leak to us (even if we make clear in the terms of use that this is responsibility of the user). How likely is this to happen? Can we do something to avoid it?
You need to consult a Lawyer before you go live.
The thinking you are using did not work for Napster, Napster argued that they were not in control of how the users shared the content, they were just a vehicle to share it on. They lost in court, so that might be one precedent someone uses to sue you.
I am not a lawyer, and I do not play one on TV, so please contact a lawyer, spend the little money it will cost you to have a two-hour conversation, and make sure you are covered.