Grokster Wins Peer-to-Peer Battle

In what is poised to spark a debate of significant economic impact for the entertainment industry in the United States Supreme Court, a unanimous panel of the Ninth Circuit U.S. Court of Appeals recently ruled that Grokster, Ltd. and StreamCast Networks, Inc. ' distributors of the Morpheus program ' will live another day, as they do not infringe film and music copyrights by facilitating file-sharing over the Internet.

A coalition of movie studios and record companies had sued the defendants in an attempt to shut down the trading of pirated content facilitated by the Morpheus program in Metro-Goldwyn-Mayer v. Grokster, No. 03-55894, No. 03-55901, No. 03-56236, 2004 U.S. App. LEXIS 17471 (9th Cir., Aug. 19, 2004).

The three-judge panel, led by Judge Sidney Thomas, flatly rejected the film industry's argument and ruled that the suit fails two legal tests used to determine liability for copyright infringement.

“The copyright owners urge a re-examination of the law in the light of what they believe to be proper public policy, expanding exponentially the reach of the doctrines of contributory and vicarious copyright infringement,” according to the opinion. “Not only would such a renovation conflict with binding precedent, it would be unwise. Doubtless, taking that step would satisfy the copyright owners' immediate economic aims. However, it would also alter general copyright law in profound ways with unknown ultimate consequences outside the present context,” Judge Thomas wrote.

While the Ninth Circuit's decision upholding a partial motion for summary judgment by Central District Judge Stephen Wilson was widely anticipated, the decision is important because it draws a clear distinction between the file-sharing methods employed by Grokster and those used by Napster, whose practices were found to be infringing in A&M Records v. Napster, 239 F.3d 1004, and in A&M Records v. Napster, 284 F.3d 1091. Napster was forced to shut down after the decisions. Its assets were purchased and the company subsequently became a paid service.

Where Napster used a centralized index to tell people where to look for files, the Grokster and StreamCast programs do not, meaning they have less control over the traded content, according to the Ninth Circuit's opinion.

Design Makes the Difference

According to Michael Albert, an expert in copyright and Web-related litigation and the head of the litigation department at Boston intellectual property firm Wolf, Greenfield & Sacks, P.C., “[s]oftware design is the core difference between the court's decision in the Grokster case, where it held file-sharing software distributors not liable for indirect copyright infringement, and its decision 4 years earlier, which led to the demise of Napster.”

“Unlike Napster, the file sharing systems at issue in the Grokster case had no centrally maintained index of files,” Albert continues. “Peer-to-peer file-sharing software is a tool. The Ninth Ciruit effectively held that just because the tool can be used to infringe does not make the developers or providers of that software tool liable for their users' infringement, particularly since the tool also has substantial non-infringing uses. It is also worth noting that, even if the defendant companies ceased to exist and shut down their computers, the software already in the hands of hundreds of millions of users would continue to work. Since much of the software at issue is 'open source' and already widely disseminated, others could continue to develop and improve the code even if the defendant companies stopped working on it.”

Albert adds that, “because the software was designed so that the file sharing companies could not control or directly monitor users' activities, the court refused to hold those companies liable, even though the companies admitted that some (and probably most) users of the software were themselves infringing copyrights.”

Besides the Napster cases, the ruling also heavily relied upon the historic U.S. Supreme Court decision involving Sony and its Betamax videocassette recorder. In Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417 (1984), the Supreme Court held that the sale of videocassette recorders did not engender copyright infringement even though the defendants knew that some users were using the machines to make illegal copies.

“The [Sony] Court rejected the argument made by movie and television producers that unauthorized 'time-shifting' (recording a program to watch at a different time) constituted copyright infringement, and thus found that the VCR had 'substantial noninfringing uses' and that the sale of the VCR alone did not violate copyright law,” Albert says.

“In the Grokster decision, the Ninth Circuit interpretted the 'substantial noninfringing uses' test in two ways which were favorable to the peer-to-peer companies. First, the court held that no fixed minimum percentage of noninfringing uses is required for a product to be protected under Sony. Second, the court held that a claim of contributory copyright infringement would be defeated if the product were capable of substantial or commercially significant noninfringing uses, without requiring the defendant to demonstrate actual noninfringing use.”

Albert also observes another important analogy with the Sony case as the Ninth Circuit rejected the producers' claim that peer-to-peer software distributors should be held liable for failing to implement anti-infringement technology. The argument was made in the Sony case that Sony could have included a feature in the VCR to detect protected content. However, the mere fact that Sony could have, but did not, incorporate anti-infringement technology into its product was not a sufficient basis for the court to find it liable to the copyright owners. Likewise, in Grokster, the software distributors could have modified the software to detect and eliminate protected content, but did not choose to do so ' yet this choice, similarly, was not a sufficient basis for finding them liable.

When asked if the plaintiffs would have fared better with a different argument, Albert remarked that a more moderate approach might have been more persuasive to the Court.

“The plaintiffs were in a difficult position, because the trend in the law clearly suggested the outcome that the Ninth Circuit reached,” Albert says. “Nevertheless, it is possible that the plaintiffs might have fared better had they taken a more moderate stance. Their claims of catastrophic harm to the industry closely paralleled those made by the copyright owners in the Sony case, which, in hindsight, have turned out to be dubious. The court did not want to shut down an emerging technology that has numerous potential uses, many of which are not copyright infringement. Under the plaintiffs' theory of the case, it would have been quite difficult for the Court to prohibit only those infringing uses of the software without virtually eliminating the noninfringing uses. If the plaintiffs had given the court a way to preserve the legitimate uses of peer-to-peer software, while finding liability only for those uses most directly tied to widespread infringement, they might have had a chance to carve out at least a narrow victory.”

Albert cautions that while the legal and practical momentum right now may favor openness as to file-sharing over the Internet, “there is clear evidence emerging that well-run, pay-per-download sites with authorized access to the source materials Internet users are seeking can be a viable alternative to illegal peer-to-peer copying. Taken together with the fact that copyright owners have begun filing high-profile lawsuits against individual peer-to-peer downloaders, the momentum may be in place for a cultural shift toward the use of legitimate, licensed, reasonably-priced commercial content Web sites.”

Cindy Cohn, legal director at the Electronic Frontier Foundation, which represented StreamCast, says that the studios will eventually be the winners because of the decision.

She also believes the decision will be a “great boon” to technological innovation, which has been curtailed by the fighting over copyrights.

“I think this will take a chill off of any area where the technology created deals with copyrighted works,” she says. “I think we will see more products.”

“The problem is not peer-to-peer, it's how do you get artists paid. The problem needs to be redefined in that way,” Cohn says.

Russell Frackman of Mitchell Silberberg & Knupp in Los Angeles, and Carey Ramos of Paul, Weiss, Rifkind, Wharton & Garrison in New York, argued on behalf of the plaintiffs at the Ninth Circuit.

Similar Networks Applaud Decision

Nikki Hemming, chief executive officer of Sharman Networks, the Sydney-based company that distributes the immensely popular KaZaA peer-to-peer software, lauded the ruling as “a fantastic result for the peer-to-peer community. This ruling reinforces similar decisions in other courts around the world that peer-to-peer is legal.”

She called on the entertainment industry to “stop litigating and start partnering with us. Legislation is not the answer, commercialization of peer-to-peer is.”

Rod Dorman, lead trial counsel for Sharman Networks in the U.S., said in a statement that Sharman would now seek a U.S. court ruling that the KaZaA software is legal.

“This is a victory for the technology industry and fans, artists and owners of entertainment content,” he says.

Sharman is involved in litigation in the U.S. and Australia over whether its KaZaA software, used by millions of computer users around the world, is responsible for copyright infringement.

Dorman says the ruling also sent a message to file swappers “that they must use the software responsibly.”

Dorman points out that the U.S. decision could not be used as precedent in Sharman's Australian copyright infringement case, because U.S. and Australian laws are slightly different.

“Regardless, the reasoning of the Ninth Circuit decision is powerful, sound and persuasive,” he says. “In addition, and more importantly, we are a global community and there should be consistent doctrines governing the application of copyright law to the Internet worldwide. I expect that the Australian court will consider the reasoning of the Ninth Circuit during its deliberations.”

Late last year, the Dutch Supreme Court ruled that KaZaA's Netherlands division cannot be held liable for copyright infringement of music or movies swapped using its free software.

In what is poised to spark a debate of significant economic impact for the entertainment industry in the United States Supreme Court, a unanimous panel of the Ninth Circuit U.S. Court of Appeals recently ruled that Grokster, Ltd. and StreamCast Networks, Inc. ' distributors of the Morpheus program ' will live another day, as they do not infringe film and music copyrights by facilitating file-sharing over the Internet.

A coalition of movie studios and record companies had sued the defendants in an attempt to shut down the trading of pirated content facilitated by the Morpheus program in Metro-Goldwyn-Mayer v. Grokster, No. 03-55894, No. 03-55901, No. 03-56236, 2004 U.S. App. LEXIS 17471 (9th Cir., Aug. 19, 2004).

The three-judge panel, led by Judge Sidney Thomas, flatly rejected the film industry's argument and ruled that the suit fails two legal tests used to determine liability for copyright infringement.

“The copyright owners urge a re-examination of the law in the light of what they believe to be proper public policy, expanding exponentially the reach of the doctrines of contributory and vicarious copyright infringement,” according to the opinion. “Not only would such a renovation conflict with binding precedent, it would be unwise. Doubtless, taking that step would satisfy the copyright owners' immediate economic aims. However, it would also alter general copyright law in profound ways with unknown ultimate consequences outside the present context,” Judge Thomas wrote.

While the Ninth Circuit's decision upholding a partial motion for summary judgment by Central District Judge Stephen Wilson was widely anticipated, the decision is important because it draws a clear distinction between the file-sharing methods employed by Grokster and those used by Napster, whose practices were found to be infringing in A&M Records v. Napster , 239 F.3d 1004, and in A&M Records v. Napster, 284 F.3d 1091. Napster was forced to shut down after the decisions. Its assets were purchased and the company subsequently became a paid service.

Where Napster used a centralized index to tell people where to look for files, the Grokster and StreamCast programs do not, meaning they have less control over the traded content, according to the Ninth Circuit's opinion.

Design Makes the Difference

According to Michael Albert, an expert in copyright and Web-related litigation and the head of the litigation department at Boston intellectual property firm Wolf, Greenfield & Sacks, P.C., “[s]oftware design is the core difference between the court's decision in the Grokster case, where it held file-sharing software distributors not liable for indirect copyright infringement, and its decision 4 years earlier, which led to the demise of Napster.”

“Unlike Napster, the file sharing systems at issue in the Grokster case had no centrally maintained index of files,” Albert continues. “Peer-to-peer file-sharing software is a tool. The Ninth Ciruit effectively held that just because the tool can be used to infringe does not make the developers or providers of that software tool liable for their users' infringement, particularly since the tool also has substantial non-infringing uses. It is also worth noting that, even if the defendant companies ceased to exist and shut down their computers, the software already in the hands of hundreds of millions of users would continue to work. Since much of the software at issue is 'open source' and already widely disseminated, others could continue to develop and improve the code even if the defendant companies stopped working on it.”

Albert adds that, “because the software was designed so that the file sharing companies could not control or directly monitor users' activities, the court refused to hold those companies liable, even though the companies admitted that some (and probably most) users of the software were themselves infringing copyrights.”

Besides the Napster cases, the ruling also heavily relied upon the historic U.S. Supreme Court decision involving Sony and its Betamax videocassette recorder. In Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417 (1984), the Supreme Court held that the sale of videocassette recorders did not engender copyright infringement even though the defendants knew that some users were using the machines to make illegal copies.

“The [Sony] Court rejected the argument made by movie and television producers that unauthorized 'time-shifting' (recording a program to watch at a different time) constituted copyright infringement, and thus found that the VCR had 'substantial noninfringing uses' and that the sale of the VCR alone did not violate copyright law,” Albert says.

“In the Grokster decision, the Ninth Circuit interpretted the 'substantial noninfringing uses' test in two ways which were favorable to the peer-to-peer companies. First, the court held that no fixed minimum percentage of noninfringing uses is required for a product to be protected under Sony. Second, the court held that a claim of contributory copyright infringement would be defeated if the product were capable of substantial or commercially significant noninfringing uses, without requiring the defendant to demonstrate actual noninfringing use.”

Albert also observes another important analogy with the Sony case as the Ninth Circuit rejected the producers' claim that peer-to-peer software distributors should be held liable for failing to implement anti-infringement technology. The argument was made in the Sony case that Sony could have included a feature in the VCR to detect protected content. However, the mere fact that Sony could have, but did not, incorporate anti-infringement technology into its product was not a sufficient basis for the court to find it liable to the copyright owners. Likewise, in Grokster, the software distributors could have modified the software to detect and eliminate protected content, but did not choose to do so ' yet this choice, similarly, was not a sufficient basis for finding them liable.

When asked if the plaintiffs would have fared better with a different argument, Albert remarked that a more moderate approach might have been more persuasive to the Court.

“The plaintiffs were in a difficult position, because the trend in the law clearly suggested the outcome that the Ninth Circuit reached,” Albert says. “Nevertheless, it is possible that the plaintiffs might have fared better had they taken a more moderate stance. Their claims of catastrophic harm to the industry closely paralleled those made by the copyright owners in the Sony case, which, in hindsight, have turned out to be dubious. The court did not want to shut down an emerging technology that has numerous potential uses, many of which are not copyright infringement. Under the plaintiffs' theory of the case, it would have been quite difficult for the Court to prohibit only those infringing uses of the software without virtually eliminating the noninfringing uses. If the plaintiffs had given the court a way to preserve the legitimate uses of peer-to-peer software, while finding liability only for those uses most directly tied to widespread infringement, they might have had a chance to carve out at least a narrow victory.”

Albert cautions that while the legal and practical momentum right now may favor openness as to file-sharing over the Internet, “there is clear evidence emerging that well-run, pay-per-download sites with authorized access to the source materials Internet users are seeking can be a viable alternative to illegal peer-to-peer copying. Taken together with the fact that copyright owners have begun filing high-profile lawsuits against individual peer-to-peer downloaders, the momentum may be in place for a cultural shift toward the use of legitimate, licensed, reasonably-priced commercial content Web sites.”

Cindy Cohn, legal director at the Electronic Frontier Foundation, which represented StreamCast, says that the studios will eventually be the winners because of the decision.

She also believes the decision will be a “great boon” to technological innovation, which has been curtailed by the fighting over copyrights.

“I think this will take a chill off of any area where the technology created deals with copyrighted works,” she says. “I think we will see more products.”

“The problem is not peer-to-peer, it's how do you get artists paid. The problem needs to be redefined in that way,” Cohn says.

Russell Frackman of Mitchell Silberberg & Knupp in Los Angeles, and Carey Ramos of Paul, Weiss, Rifkind, Wharton & Garrison in New York, argued on behalf of the plaintiffs at the Ninth Circuit.

Similar Networks Applaud Decision

Nikki Hemming, chief executive officer of Sharman Networks, the Sydney-based company that distributes the immensely popular KaZaA peer-to-peer software, lauded the ruling as “a fantastic result for the peer-to-peer community. This ruling reinforces similar decisions in other courts around the world that peer-to-peer is legal.”

She called on the entertainment industry to “stop litigating and start partnering with us. Legislation is not the answer, commercialization of peer-to-peer is.”

Rod Dorman, lead trial counsel for Sharman Networks in the U.S., said in a statement that Sharman would now seek a U.S. court ruling that the KaZaA software is legal.

“This is a victory for the technology industry and fans, artists and owners of entertainment content,” he says.

Sharman is involved in litigation in the U.S. and Australia over whether its KaZaA software, used by millions of computer users around the world, is responsible for copyright infringement.

Dorman says the ruling also sent a message to file swappers “that they must use the software responsibly.”

Dorman points out that the U.S. decision could not be used as precedent in Sharman's Australian copyright infringement case, because U.S. and Australian laws are slightly different.

“Regardless, the reasoning of the Ninth Circuit decision is powerful, sound and persuasive,” he says. “In addition, and more importantly, we are a global community and there should be consistent doctrines governing the application of copyright law to the Internet worldwide. I expect that the Australian court will consider the reasoning of the Ninth Circuit during its deliberations.”

Late last year, the Dutch Supreme Court ruled that KaZaA's Netherlands division cannot be held liable for copyright infringement of music or movies swapped using its free software.