High Court Rules Against File-Sharing Networks

The argument for imposing indirect liability in this case is a powerful one, given the number of infringing downloads occurring daily via P2P software, Justice David Souter wrote in the court’s opinion. When a widely shared service or product is used to commit infringement, it may be impossible to protect copyright from all direct infringers, Souter said. The only practical alternative is to go against the distributor of the copying device for secondary liability on a theory of contributory or vicarious infringement, the court said. “The record is replete with evidence that from the moment Grokster and StreamCast began to distribute their free software, each one clearly voiced the objective that recipients use it to download copyrighted works, and each took active steps to encourage infringement,” Souter wrote.

The justices agreed with MGM that the Court of Appeals misapplied Sony Betamax, which it read as “limiting secondary liability quite beyond the circumstances to which the case applied.” Sony barred secondary liability based on presuming or imputing intent to cause infringement solely from the design or distribution of a product capable of substantial lawful use, which the distributor knows in fact to be used for infringement, Souter wrote. The appeals court read Sony’s limitation to mean that whenever a product is capable of substantial lawful use, the producer never can be held liable for 3rd parties infringing use of it.

Justice Ruth Bader Ginsburg wrote a concurring decision, joined by Justices Anthony Kennedy and William Rehnquist. The appeals court “went astray,” Ginsburg wrote, adding that when the case reached the high court, “there was evidence that Grokster’s and StreamCast’s products were, and had been for some time, overwhelmingly used to infringe… and that this infringement was the overwhelming source of revenue from the products.” Fairly appraised, “the evidence was insufficient to demonstrate, beyond genuine debate, a reasonable prospect that substantial or commercially significant noninfringing uses were likely to develop over time,” Ginsberg wrote. Justice Stephen Breyer wrote a 2nd concurrence, joined by Justices John Paul Stevens and Sandra Day O'Connor. Breyer said Grokster itself “may well be liable under today’s holding” but reminded the content industry that it could develop new technologies -- like digital watermarking and fingerprinting -- to help curb unlawful infringement and inform users through encoded data about the author and the copyright scope and date.

High-Tech & Entertainment Industries Respond

P2P advocates said the new standard set by the court’s decision is too vague. Richard Taranto, who argued the case on behalf of Grokster and StreamCast, said the most notable immediate aspect of the majority opinion is its murkiness. He said the court has given high-tech companies “a very difficult roadmap to follow.” The Electronic Frontier Foundation’s (EFF) Fred von Lohmann said the decision will “unleash a new era of legal uncertainty on America’s innovators” and give inventors a new framework for copyright liability. This new liability theory will tie up the courts, opening the door to probes into firms’ marketing materials, engineering notes and other internal and external communications, von Lohmann said: “That’s a very expensive threat for most technology companies to face.” But he seemed hopeful that when evidence is presented in the Cal. court, the judge should realize that the P2P networks have not violated the Supreme Court’s new test. StreamCast CEO Michael Weiss added that “the David versus Goliath matter” will continue.

Public Knowledge Pres. Gigi Sohn and Grokster attorney Michael Page viewed the decision as bittersweet, noting at least one positive aspect for high-tech companies and consumers. The ruling reaffirms the Sony doctrine’s core principles, stating that P2P as a technology can be used for substantial noninfringing uses. Sohn said without “clear expression or other affirmative acts fostering infringement,” P2P companies won’t face secondary liability. But Page added that the result also leaves industry with “a whole bunch of conflicting signals and standards” about what inducement and infringement mean. This will result in more litigation and more court battles, he said.

StreamCast attorney Charles Baker agreed, adding that there a substantial body of evidence has not been brought forward that his client intends to reveal to the Cal. court. StreamCast Gen. Counsel Matthew Neco added that the ruling lets copyright holders and the content industry “become the thought police” and all garage inventors and high-tech innovators will have to be careful because “their every thought and their every action will now be subject to discovery and expensive litigation.” “Massive uncertainty” and “massive legal bills” are likely to flow from the decision, Consumer Electronics Assn. (CEA) CEO Gary Shapiro said. “Innovators must now consider murky legal rules and potentially overwhelming legal costs before they bring their product to market -- or even moving forward with an innovative idea,” he said.

The entertainment industry’s IP rights have been affirmed, so there’s “absolutely no need for Congress to act,” Sohn said: “There’s nothing that Hollywood should want or need here from Congress.” MPAA and RIAA executives weren’t so quick to concur. Given the uniformity of the justices’ ruling, there won’t be a “mad rush to the Hill” but there likely still will be hearings scheduled and perhaps bills dropped.

MPAA CEO Dan Glickman said the 9-0 ruling sends a strong message that “if you build a business that aids and abets theft, you will be held accountable.” This case does not break any new ground, he told reporters at a press briefing, but is a “reaffirmation of common law in the digital age.” The decision protects the free market and safeguards innovation, technology and creativity, Glickman said. If the often divided Supreme Court can come to a unanimous decision on this contentious case, “surely the content industry and high-tech sector can come together to power the digital age,” he said. RIAA CEO Mitch Bainwol said he experienced a wakeful weekend but “tonight I'll sleep like a baby.” Contradicting P2P advocates, he said the court spoke with great clarity: “Today’s not a panacea [but] it represents the beginning of a new day.”

“This is the most important judgment involving the music industry in 20 years,” International Federation of the Phonographic Industry Chmn. John Kennedy said. The ruling destroys the argument that P2P services bear no responsibility for illegal activities occurring on their networks, he said. By ruling that technology distributors can’t build a business based on promoting copyright infringement, the Supreme Court has boosted the development of legitimate online music worldwide, Kennedy said.

Perspectives on Possible Repercussions

The Court’s active promotion standard is intentionally fuzzy, intellectual property attorney Ian DiBernardo said: “It’s not uncommon for the Supreme Court to enunciate a standard like this and leave it to the lower courts” to settle on the details. He “wouldn’t be surprised to see some people sit on the sidelines” and wait for lower court rulings. But the Court’s statements on Grokster’s business model and history -- especially the fact it “leveraged software that was compatible with the [original] Napster system” -- are a guide toward future jurisprudence, DiBernardo added. “My sense is that most [future cases] will be very fact-specific,” analyzing a firm’s actions on an ad hoc basis apart from any clear standards of guilt.

The fact that Grokster used a decentralized system could scare P2P firms back into using centralized servers to closely monitor network traffic: “It’s in the network providers’ best interest to have a policing system” to insulate themselves from liability, DiBernardo said.

The future of the content industry’s legal campaign against end users is in doubt. “It wouldn’t surprise me to see a reduction in those kinds of cases” if industry finds courts siding with it against P2P makers, DiBernardo said. But the uncertainty of the court’s “active promotion” test could keep the content industry “very leery of bringing the next suit” against a P2P firm if evidence of infringement isn’t rock-solid, he added. “You don’t want the first case after Grokster to be a finding of noninfringement,” which would “give a roadmap to another defendant” for avoiding secondary liability.

Rethinking the Ruling

Early analyses framed the ruling as a Grokster loss, but it is, “in a larger sense, nothing of the kind,” said American U. law prof. Peter Jazsi. It’s a “setback for the immediate parties” but a “victory for the principle that was at stake,” the landmark Sony principle of “substantial, non-infringing use.” The content industry wanted to revisit Sony, but 6 justices vetoed that, he said. And more important than the majority opinion is Breyer’s concurrence supporting the justices voting to keep Sony intact, which Jazsi called “the moral heart or center of this opinion.” Consumer Federation of America (CFA) Research Dir. Mark Cooper was similarly contrarian: “It’s quite clear that Hollywood did not get what they wanted in this court ruling.” There’s “a world of behaviors [by P2P firms] that we think will not run afoul of this interpretation… assuming the lower courts get it right,” he added.

Sharman Networks Exec. Vp Alan Morris called the decision “a clear opportunity for the legal system to vindicate” that firm, which makes Kazaa. Sharman never has induced users to infringe copyrights, and repeatedly has asked content providers to license their works with Sharman through Altnet, Morris said. The firm is suffering “a coordinated boycott” by content owners intent on “deprive[ing] consumers of the broadest possible choices at the least possible cost,” he said.

The Court “avoided many tests that would have entangled lower courts and lawyers in the technology design process,” although lower-court interpretation could complicate that, said Center for Democracy & Technology (CDT) Staff Counsel David Sohn in a statement. CDT never doubted Grokster and Streamcast were “innocent parties that should get a free pass,” he said. CDT Pres. Jerry Berman called the decision “a sophisticated ruling in a difficult case.”

Contrary to claims it will stifle technology, the ruling could unleash many more options, some said. “The decision in Grokster means that consumers win, too -- less free riding, but more legit options competing fiercely for their dollar,” said Solveig Singleton, Progress & Freedom Foundation senior adjunct fellow: “The Court has done its level best to protect innovators, but not every application of every innovation.” National Academy of Recording Arts & Sciences Neil Portnow said the Court “has defended an environment for legal online music services to thrive… Our membership embraces new technologies that deliver their music to fans in innovative ways.” Entertainment Software Assn. (ESA) Pres. Douglas Lowenstein called the game industry “perhaps the most proactive of any… in its embrace of the Internet as a tool for distributing our products,” but their innovations “can only thrive in an environment where copyright laws are strong.”

The volume of online piracy is unlikely to fall as a result of the decision, Medley Global Advisors said in a statement. “Many of the companies that provide peer-to- peer software, including Grokster, are outside the U.S. and beyond the reach of U.S. law enforcement.” But companies focused on DRM, such as Microsoft and Apple, will likely benefit as options for legal music online multiply, it said.

Some technology groups downplayed the possibility of lower-court confusion and content industry exploitation of uncertainty. Technology makers don’t have to worry that their creations “might be so facilitative of illegal content… they're going to be in legal trouble just for putting it on the market,” NetCoalition counsel Markham Erickson told us. Under the Supreme Court’s guidance, lower courts will be able to discern between firms with “unclean hands” and “subjects of legal fishing expeditions.” The decision “should enable businesses to understand what the [legal] test is and how it should be applied, and not leave us in the lurch,” Information Technology Assn. of America (ITAA) Senior Vp Joe Tasker said. The content industry didn’t get all it wanted, leading to “a world where the sides will have to work together” to satisfy growing customer demand, Erickson said. The fact that only 2 secondary liability cases have gone to the Supreme Court in 20 years is a good sign: “If we get another 20 years off this decision, that’s pretty good.”