Contributory Copyright Infringement and Peer-to-Peer Networks

The court granted Grokster's and StreamCast's motion for summary judgment. Kazaa, based in the Netherlands, had transferred all its assets to Sharman Networks, an entity organized under the laws of Vanuatu and doing business in Australia, while related legal action was pending against it in the Netherlands. Subsequently, Kazaa has ceased to defend this action in California. Sharman Networks has not moved for summary judgment and the court emphasized that it offers no opinion in its Order as to Sharman's potential liability.

Relying on the Supreme Court's decision in Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417 (1984) and distinguishing Grokster's and StreamCast's activities from those of Napster, the court held that the defendants are not liable for contributory or vicarious copyright infringement where users of defendants' software engage in direct copyright infringement by sharing copyrighted works through a peer-to-peer network.

Liability for contributory infringement lies where one induces, causes or materially contributes to the infringing conduct of another and has knowledge of such infringing conduct. The Supreme Court held in Sony that 'the sale of copying equipment, like the sale of other articles of commerce, does not constitute contributory infringement if the product is widely used for legitimate, unobjectionable purposes. Indeed, it need merely be capable of substantial noninfringing uses.' See Sony, at 442. The Grokster court found that the software distributed by the defendants had substantial non-infringing uses such as the sharing of non-copyrighted works, or the sharing of works with the permission of the copyright owner. By distributing software that can be employed by its users for lawful and unlawful ends, the court found, Grokster and StreamCast were 'not significantly different from companies that sell home video recorders or copy machines, both of which can be and are used to infringe copyrights.' See Grokster, at *40. Rather, to be held liable as a contributory infringer, there must be actual knowledge of specific infringement at the time of the material contribution to such infringement so that the potential contributory infringer can use such knowledge to stop the particular infringement. This is where the main difference between Sony and Grokster on the one hand and Napster on the other hand lies. Napster did not merely distribute software that enabled users to share files, but it hosted a central index of user files and operated servers that were crucial to the operation of the Napster network. Each search request passed through Napster's servers. This ongoing control of Napster with respect to the infringing activities of its users or, more specifically, the failure to cease the material contribution to its users' infringement upon obtaining specific knowledge thereof, was in effect the basis for finding liability of Napster. See A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1022 (9th Cir. 2001). In contrast, Grokster and StreamCast did not exercise such ongoing control. The court found that neither defendant did anything, aside from distributing the software, to actively facilitate their users' infringing conduct. In other words, '[i]f either Defendant closed their doors and deactivated all computers within their control, users of their products could continue sharing files with little or no interruption, [while if] Napster deactivated its computers, users would no longer be able to share files through the Napster network.' See Grokster, supra, at *35-36. Finally, the court rejected the plaintiffs' contention that the defendants facilitate infringement on an ongoing basis by providing updates to the respective client software.

For similar reasons, the court found that Grokster and StreamCast are not vicariously liable for their users' infringement. Vicarious liability lies where a party has the right and ability to supervise another's infringing activity and derives a financial benefit from such activity. As opposed to contributory liability, knowledge of the infringement is not required. Adopting the broad definition of financial benefit formulated in Napster, supra, at 1023 ('financial benefit exists where the availability of infringing material acts as a draw for customers') (internal quotes and citation omitted) and noting significant advertising revenue, the court found that the defendants derive a financial benefit from the infringement. However, unlike Napster, neither defendant had the right and ability to supervise its users' conduct, as there were no centralized search indices or mandatory user registration requirements, and no other ability to police users' conduct. Thus, the decision confirms what Napster already implied: Having less or, ideally, no control over the respective peer-to-peer network and users' activities lowers the risk of a finding of secondary liability.

The International Dimension

A few international aspects relating to this decision are also worth noting. First, in its discussion of substantial noninfringing uses of the client software distributed by the defendants, the court specifically mentioned 'using the software in countries where it is legal' as one such use. See Grokster, supra, at *18. This raises the question whether a defendant would have a viable defense against a claim of contributory infringement of a U.S. copyright where such defendant distributes a product that has no substantial noninfringing use in the United States, but does have such uses in foreign countries. The question might be even more interesting with respect to contributory infringement under section 271(c) of the Patent Act (35 U.S.C. ' 271(c)). Since the court identified various other noninfringing uses in the United States, it apparently had no reason to reflect upon the potential implications of this specific finding.

Second, the Court of Appeals of Amsterdam found no liability of Kazaa based on its distribution of the Kazaa Media Desktop client software. See Kazaa/Buma-Stemra, Court of Appeals, Amsterdam, March 28, 2002, Case No. 1370/01SKG. The Amsterdam court's arguments are strikingly similar to the California district court's reasoning in Grokster.

Finally, the very interesting issue of personal jurisdiction where the defendant, Sharman Networks, is an entity organized under the laws of Vanuatu, has a principal place of business in Australia, and distributes software that is hosted on servers in Denmark worldwide via the Internet, was discussed by the Grokster court in an earlier decision. See 243 F. Supp. 2d 1073 (C.D. Cal. 2003) (finding jurisdiction based on download of the software by at least 20 million users in the United States).

Outlook

Failing to strike one of the Hydra's heads, the entertainment industry appears to remember that there are (at least) eight others. As part of a strategic campaign against online file-swapping of music and other content, record companies and motion picture studios are systematically targeting other parties, including students and other users, universities, employers, and Internet service providers. The latest addition to the list is investors. In late April of this year, Universal Music and EMI filed suit against Hummer Winblad Venture Partners based on their investment in Napster, raising the issue of 'tertiary' copyright liability. Meanwhile Apple's iTunes Music Store appears to prove that music can be sold online, with reports of sales of more than two million songs, at 99 cents per song, in its first two weeks of existence ' peer-to-peer file sharing networks notwithstanding.

Rufus J. Pichler is an attorney in the San Francisco office of Morrison & Foerster LLP and is a member of the firm's Technology Transactions Group. He is also admitted to practice law in Germany and has specific experience in cross-border transactions and international intellectual property law matters.

The second labor of Hercules was to kill the monstrous nine-headed Hydra. When Hercules struck off one of the Hydra's heads, two new ones grew forth in its place. The entertainment industry's fight against its modern menace, peer-to-peer file sharing networks, presents no lesser task. The record companies successfully shut down Napster ( see A&M Records, Inc. v. Napster, Inc., 114 F. Supp. 2d 896 (N.D. Cal. 2000), aff'd in part, rev'd in part, 239 F.3d 1004 (9th Cir. 2001)) and Aimster (see In re Aimster Copyright Litig. , 2002 U.S. Dist. LEXIS 17054 (N.D. Ill. 2002)) only to witness the instant emergence of Gnutella, Grokster, Kazaa, Morpheus, and similar services (as well as the re-emergence of Aimster, now known as Madster). We know, of course, that Hercules completed his second labor after figuring out that he could prevent growth of the new heads by burning the wound. However, unlike the Hydra, peer-to-peer file sharing technologies evolve quickly and swiftly adapt to changed circumstances. Thus, Hollywood's plaintiffs are likened more to Sisyphus (who was condemned to an eternity of pushing the rock up the mountain only to have it fall down again) than to Hercules. The most recent example is the decision in Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd., 2003 U.S. Dist. LEXIS 6994 (C.D. Cal. April 25, 2003).

The Decision in MGM v. Grokster

The plaintiffs in the two consolidated cases, the major motion picture studios and record companies (in the original MGM Studios, Inc. v. Grokster, Ltd. case) and a class of professional songwriters and music publishers (in the original Leiber v. Consumer Empowerment BV case), brought an action for contributory and vicarious copyright infringement in connection with the sharing of music, movies and other digital content in certain peer-to-peer networks. Peer-to-peer networks consist of certain network technology and a client software or 'node' that allows users to connect to each other. The defendants, Grokster, Ltd., StreamCast Networks, Inc., Kazaa BV, and Sharman Networks, each distribute peer-to-peer software. Initially, Grokster, StreamCast and Kazaa all used the proprietary FastTrack network technology (developed by the Dutch founders of Kazaa and licensed through another entity) and distributed a version of the Kazaa Media Desktop software. StreamCast subsequently developed its own client software called Morpheus and now utilizes the open source Gnutella network technology instead of FastTrack.

The court granted Grokster's and StreamCast's motion for summary judgment. Kazaa, based in the Netherlands, had transferred all its assets to Sharman Networks, an entity organized under the laws of Vanuatu and doing business in Australia, while related legal action was pending against it in the Netherlands. Subsequently, Kazaa has ceased to defend this action in California. Sharman Networks has not moved for summary judgment and the court emphasized that it offers no opinion in its Order as to Sharman's potential liability.

Relying on the Supreme Court's decision in Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417 (1984) and distinguishing Grokster's and StreamCast's activities from those of Napster, the court held that the defendants are not liable for contributory or vicarious copyright infringement where users of defendants' software engage in direct copyright infringement by sharing copyrighted works through a peer-to-peer network.

Liability for contributory infringement lies where one induces, causes or materially contributes to the infringing conduct of another and has knowledge of such infringing conduct. The Supreme Court held in Sony that 'the sale of copying equipment, like the sale of other articles of commerce, does not constitute contributory infringement if the product is widely used for legitimate, unobjectionable purposes. Indeed, it need merely be capable of substantial noninfringing uses.' See Sony, at 442. The Grokster court found that the software distributed by the defendants had substantial non-infringing uses such as the sharing of non-copyrighted works, or the sharing of works with the permission of the copyright owner. By distributing software that can be employed by its users for lawful and unlawful ends, the court found, Grokster and StreamCast were 'not significantly different from companies that sell home video recorders or copy machines, both of which can be and are used to infringe copyrights.' See Grokster, at *40. Rather, to be held liable as a contributory infringer, there must be actual knowledge of specific infringement at the time of the material contribution to such infringement so that the potential contributory infringer can use such knowledge to stop the particular infringement. This is where the main difference between Sony and Grokster on the one hand and Napster on the other hand lies. Napster did not merely distribute software that enabled users to share files, but it hosted a central index of user files and operated servers that were crucial to the operation of the Napster network. Each search request passed through Napster's servers. This ongoing control of Napster with respect to the infringing activities of its users or, more specifically, the failure to cease the material contribution to its users' infringement upon obtaining specific knowledge thereof, was in effect the basis for finding liability of Napster. See A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1022 (9th Cir. 2001). In contrast, Grokster and StreamCast did not exercise such ongoing control. The court found that neither defendant did anything, aside from distributing the software, to actively facilitate their users' infringing conduct. In other words, '[i]f either Defendant closed their doors and deactivated all computers within their control, users of their products could continue sharing files with little or no interruption, [while if] Napster deactivated its computers, users would no longer be able to share files through the Napster network.' See Grokster, supra, at *35-36. Finally, the court rejected the plaintiffs' contention that the defendants facilitate infringement on an ongoing basis by providing updates to the respective client software.

For similar reasons, the court found that Grokster and StreamCast are not vicariously liable for their users' infringement. Vicarious liability lies where a party has the right and ability to supervise another's infringing activity and derives a financial benefit from such activity. As opposed to contributory liability, knowledge of the infringement is not required. Adopting the broad definition of financial benefit formulated in Napster, supra, at 1023 ('financial benefit exists where the availability of infringing material acts as a draw for customers') (internal quotes and citation omitted) and noting significant advertising revenue, the court found that the defendants derive a financial benefit from the infringement. However, unlike Napster, neither defendant had the right and ability to supervise its users' conduct, as there were no centralized search indices or mandatory user registration requirements, and no other ability to police users' conduct. Thus, the decision confirms what Napster already implied: Having less or, ideally, no control over the respective peer-to-peer network and users' activities lowers the risk of a finding of secondary liability.

The International Dimension

A few international aspects relating to this decision are also worth noting. First, in its discussion of substantial noninfringing uses of the client software distributed by the defendants, the court specifically mentioned 'using the software in countries where it is legal' as one such use. See Grokster, supra, at *18. This raises the question whether a defendant would have a viable defense against a claim of contributory infringement of a U.S. copyright where such defendant distributes a product that has no substantial noninfringing use in the United States, but does have such uses in foreign countries. The question might be even more interesting with respect to contributory infringement under section 271(c) of the Patent Act (35 U.S.C. ' 271(c)). Since the court identified various other noninfringing uses in the United States, it apparently had no reason to reflect upon the potential implications of this specific finding.

Second, the Court of Appeals of Amsterdam found no liability of Kazaa based on its distribution of the Kazaa Media Desktop client software. See Kazaa/Buma-Stemra, Court of Appeals, Amsterdam, March 28, 2002, Case No. 1370/01SKG. The Amsterdam court's arguments are strikingly similar to the California district court's reasoning in Grokster.

Finally, the very interesting issue of personal jurisdiction where the defendant, Sharman Networks, is an entity organized under the laws of Vanuatu, has a principal place of business in Australia, and distributes software that is hosted on servers in Denmark worldwide via the Internet, was discussed by the Grokster court in an earlier decision. See 243 F. Supp. 2d 1073 (C.D. Cal. 2003) (finding jurisdiction based on download of the software by at least 20 million users in the United States).

Outlook

Failing to strike one of the Hydra's heads, the entertainment industry appears to remember that there are (at least) eight others. As part of a strategic campaign against online file-swapping of music and other content, record companies and motion picture studios are systematically targeting other parties, including students and other users, universities, employers, and Internet service providers. The latest addition to the list is investors. In late April of this year, Universal Music and EMI filed suit against Hummer Winblad Venture Partners based on their investment in Napster, raising the issue of 'tertiary' copyright liability. Meanwhile Apple's iTunes Music Store appears to prove that music can be sold online, with reports of sales of more than two million songs, at 99 cents per song, in its first two weeks of existence ' peer-to-peer file sharing networks notwithstanding.

Rufus J. Pichler is an attorney in the San Francisco office of Morrison & Foerster LLP and is a member of the firm's Technology Transactions Group. He is also admitted to practice law in Germany and has specific experience in cross-border transactions and international intellectual property law matters.