MGM v. Grokster: Inducement Theory Leaves Unanswered Questions

In MGM Studios, Inc. v. Grokster, Ltd., No. 04-480 (June 27, 2005), the Supreme Court decided that the defendants could be held liable for copyright infringement perpetrated by the users of their respective software. Rather than clarifying the “significant noninfringing use” standard from Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417 (1984), to determine whether the defendants could be held liable for distributing a product with knowledge that it could be used to infringe, the Court utilized an alternative approach of finding liability. Turning to common law precedent and patent law, the unanimous Court held that liability may be based on purposeful, culpable expression under an inducement theory of secondary infringement. While some of the potential implications of this decision can be predicted, the full effect will not likely be clear for some time.

Background and Lower Court Decisions

The defendants distribute free software for the purpose of sharing data files over the Internet. This software permits users to exchange files over a peer-to-peer network that connects computers together in the absence of a centralized server. It is virtually undisputed that the majority of the file transfers involve illegal acts of copyright infringement, such as the transfer of copyrighted music or movies. The plaintiffs are owners of various copyrights that have been allegedly infringed through such file sharing. Based on the fact that the defendants had distributed the software that enabled the infringing activity, a claim was brought against them under a theory of indirect infringement. In the district court, both sides moved for summary judgment.

The two theories under which a defendant may be held indirectly liable for another's infringement are contributory infringement and vicarious infringement. Contributory infringement may be shown by proving that the defendant had knowledge of, and materially contributed to, the direct infringement. MGM Studios, Inc. v. Grokster, Ltd., 259 F. Supp. 2d 1029, 1035 (C.D. Cal. 2003). Since the defendants' software allows users to transfer files without the use of a centralized server via a peer-to-peer network, actual knowledge of specific acts of infringement could not be established as it was in Napster. See A & M Records, Inc. v. Napster, Inc., 239 F.3d 1004 (9th Cir. 2001). Constructive knowledge may be imputed to the alleged contributory infringer, but according to Sony this is only permitted if the product is not “capable of substantial noninfringing uses.” 464 U.S. at 442. Finding that the software was capable of transferring non-copyrighted works, the district court declined to impute the requisite level of knowledge to the defendants even though they had been aware that significant amounts of infringing activity were taking place. Without the knowledge requirement having been met, the defendants could not be held liable as contributory infringers. The defendants also could not be found liable as vicarious infringers, because vicarious infringement requires a showing of both financial benefit and a defendant's right and ability to supervise the infringing conduct. The lower court found that the infringing activities took place independently of the defendants and that they had no affirmative duty to design their products to disallow the transfer of copyrighted material.

On appeal, the Ninth Circuit followed the same approach as the district court. Once again, liability for contributory infringement was considered to be dependent upon an interpretation of Sony. Even though the majority of the software use was for copyright infringement, it could potentially be used in a noninfringing manner. Therefore, the Ninth Circuit agreed that the software was capable of substantial or commercially significant noninfringing uses. This broad interpretation of Sony precluded a finding of constructive knowledge on the part of the defendants. Since the plaintiffs were likewise unable to demonstrate that the defendants had actual knowledge of specific infringing activity at a time when they had the ability to prevent it from occurring, no contributory infringement could be found. Similarly, the defendants were not shown to have the right and ability to supervise the users' infringing activity, so they could not be found to be vicarious infringers. See MGM Studios, Inc. v. Grokster, Ltd., 380 F.3d 1154 (9th Cir. 2004).

Supreme Court Decision

When the case finally reached the Supreme Court, both parties once again argued for different interpretations of Sony. The defendants suggested that the Supreme Court should read the case broadly, as the Ninth Circuit had, and find that even a relatively small amount of noninfringing use of a product would qualify as being “capable of substantial noninfringing uses.” The plaintiffs, however, argued that “substantial” implies that a greater percentage of the use must be for noninfringing purposes for the product to fall under the protection of the staple article of commerce rule described in Sony, and that the defendants could therefore be considered to have constructive knowledge of the direct infringement.

The Supreme Court concluded that Sony was factually distinguishable from this case in that it dealt with imputing intent, based upon a product's uses, to a defendant that could not be shown explicitly to have intended the acts of direct infringement. Because there was some evidence of the defendants' intent to cause direct infringement with their software, including statements and actions directed to promoting infringement, there was no need to decide whether intent could be imputed based on the design and functionality of the product itself. The Court therefore refused to determine the appropriate application of the Sony rule, and instead proceeded to apply a different theory of indirect liability, namely inducement of infringement.

According to the Supreme Court, “[o]ne infringes contributorily by intentionally inducing or encouraging direct infringement.” No. 04-480, slip op. at 12. Though the lower courts had assumed that in the absence of specific knowledge of infringement Sony should always apply to bar liability if the product is capable of substantial noninfringing uses, the Court made it clear that Sony “did not displace other theories of secondary liability” and “was never meant to foreclose rules of fault-based liability derived from the common law.” Id. Accordingly, in much the same way that the Sony Court had taken the staple-article of commerce rule from 35 U.S.C. '271(c) of the patent laws, Section 271(b), which codified the inducement rule, was adopted here. As expressed by the Court, “one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties.” No. 04-480, slip op. at 19.

Having decided to analyze the defendants' liability in terms of an inducement theory, the Court proceeded to detail several examples of evidence of unlawful objectives that tended to prove that there was an intent to induce infringement. In addition to the evidence of solicitation of users through advertising and other methods by implying that copyrighted material could be downloaded using the defendants' software, three other important types of evidence were noted. First, the defendants could be shown to have directly targeted a market for copyright infringement by attempting to replace Napster. This was demonstrated by, among other things, defendants' internal memos making reference to such a goal and the fact that Grokster's name sounds like Napster. Second, the fact that neither defendant attempted to design its software to prevent the transfer of copyrighted material buttressed the inference of an intent to foster infringement. Finally, since the defendants make more money based on the number of users they have, their business model demonstrates that the more infringers are using their software, the more money they will make. Though the Court clearly states that much of this evidence alone would be insufficient to demonstrate unlawful intent, the record as a whole allows such a conclusion. Since the defendants can be shown to have had a “purpose to cause and profit from third-party acts of copyright infringement,” they may be held liable for those acts of infringement upon the distribution of the product.

The Supreme Court vacated the lower court's finding of summary judgment for the defendants and ordered reconsideration of the plaintiffs' motion for summary judgment based on an inducement theory of liability. Based on the Court's analysis of the evidence in support of inducement liability, it appears likely that the plaintiffs' motion will be granted.

Possible Implications

A close examination of the Supreme Court's Grokster opinion provides some indication of how the inducement theory may be applied to future cases. Notably, Sony is still applicable, and if a product is not “capable of substantial noninfringing uses,” then intent may be imputed and there is no need to resort to the inducement theory. However, since Sony was only addressed in the concurrences, the exact meaning of the rule remains an open question. Therefore, it can be expected that the inducement theory will be employed by plaintiffs, unless an accused product clearly has no potential noninfringing uses.

To prove inducement of infringement, a plaintiff must prove that a defendant had an intent to cause infringement, distributed a device suitable for infringing use, and that infringement actually occurred. There seems to be nothing novel about proving that infringement occurred or that a device is suitable for infringing use, so the important question is how future courts will determine if a defendant had an intent to induce infringement.

The Supreme Court stated that there must be clear expression or other affirmative steps indicating an intent to promote direct infringement to support a finding of liability under an inducement theory. Once such evidence has been accepted, however, more ambiguous evidence may be used to support a finding of intent. Stronger evidence is needed than simply knowledge of infringing potential or “ordinary acts incident to product distribution, such as offering customers technical support or product updates,” but these factors may be utilized to support a finding of intent if, in combination with other statements or actions, they demonstrate “purposeful, culpable expression and conduct.” The standard for finding clear expression or affirmative steps is not clearly articulated, although the threshold does not appear to be that difficult to reach. Evidence of the product's characteristics or potential for infringing use is obviously insufficient, but it is not necessary to prove that a message was sent out to users that encouraged them to infringe. In fact, it is suggested in the opinion that an internal memo describing the unlawful objective would be sufficient as a clear expression, while targeting a market of known infringers would qualify as an affirmative step. No. 04-480, slip op. at 21-22 (explaining that intent to induce infringement may be proven by active steps that demonstrate such a purpose, even in the absence of consumer contact). Once clear expression or affirmative steps have been found, even product design decisions or the defendant's desire to attract customers may be used to support a finding of inducement.

Once a clear expression or affirmative step is found, there will typically be sufficient other evidence to support a finding of inducement. If a product can be used to infringe, the fact that it was not designed to suppress this capability will be questioned. If the defendant makes more money because of the infringement, the profit incentive will be questioned. Future findings of liability for inducement will likely depend on how the courts interpret the finding of a clear expression or affirmative step toward fostering infringement. Many arguments will likely revolve around whether a particular act of a defendant will qualify under this vague standard.

It is possible that the courts will interpret Grokster narrowly and require a strong showing of a clear expression or affirmative step toward fostering infringement. However, Grokster suggests that virtually any statement or action related to copyright infringement, whether made directly to consumers or internally, may be considered to demonstrate an intent to promote infringement.

By avoiding the Sony safe harbor rule, and instead deciding Grokster under a theory of inducement to infringe, the Supreme Court has left open more questions than it answered. It remains unclear what qualifies as “capable of substantial noninfringing uses” once a defendant is within the protection of Sony. Also unclear is what is required to stay within the Sony rule and avoid a detailed analysis of business plans and product design decisions in finding liability for inducement.

In MGM Studios, Inc. v. Grokster, Ltd., No. 04-480 (June 27, 2005), the Supreme Court decided that the defendants could be held liable for copyright infringement perpetrated by the users of their respective software. Rather than clarifying the “significant noninfringing use” standard from Sony Corp. of America v. Universal City Studios, Inc. , 464 U.S. 417 (1984), to determine whether the defendants could be held liable for distributing a product with knowledge that it could be used to infringe, the Court utilized an alternative approach of finding liability. Turning to common law precedent and patent law, the unanimous Court held that liability may be based on purposeful, culpable expression under an inducement theory of secondary infringement. While some of the potential implications of this decision can be predicted, the full effect will not likely be clear for some time.

Background and Lower Court Decisions

The defendants distribute free software for the purpose of sharing data files over the Internet. This software permits users to exchange files over a peer-to-peer network that connects computers together in the absence of a centralized server. It is virtually undisputed that the majority of the file transfers involve illegal acts of copyright infringement, such as the transfer of copyrighted music or movies. The plaintiffs are owners of various copyrights that have been allegedly infringed through such file sharing. Based on the fact that the defendants had distributed the software that enabled the infringing activity, a claim was brought against them under a theory of indirect infringement. In the district court, both sides moved for summary judgment.

The two theories under which a defendant may be held indirectly liable for another's infringement are contributory infringement and vicarious infringement. Contributory infringement may be shown by proving that the defendant had knowledge of, and materially contributed to, the direct infringement. MGM Studios, Inc. v. Grokster, Ltd. , 259 F. Supp. 2d 1029, 1035 (C.D. Cal. 2003). Since the defendants' software allows users to transfer files without the use of a centralized server via a peer-to-peer network, actual knowledge of specific acts of infringement could not be established as it was in Napster. See A & M Records, Inc. v. Napster, Inc ., 239 F.3d 1004 (9th Cir. 2001). Constructive knowledge may be imputed to the alleged contributory infringer, but according to Sony this is only permitted if the product is not “capable of substantial noninfringing uses.” 464 U.S. at 442. Finding that the software was capable of transferring non-copyrighted works, the district court declined to impute the requisite level of knowledge to the defendants even though they had been aware that significant amounts of infringing activity were taking place. Without the knowledge requirement having been met, the defendants could not be held liable as contributory infringers. The defendants also could not be found liable as vicarious infringers, because vicarious infringement requires a showing of both financial benefit and a defendant's right and ability to supervise the infringing conduct. The lower court found that the infringing activities took place independently of the defendants and that they had no affirmative duty to design their products to disallow the transfer of copyrighted material.

On appeal, the Ninth Circuit followed the same approach as the district court. Once again, liability for contributory infringement was considered to be dependent upon an interpretation of Sony. Even though the majority of the software use was for copyright infringement, it could potentially be used in a noninfringing manner. Therefore, the Ninth Circuit agreed that the software was capable of substantial or commercially significant noninfringing uses. This broad interpretation of Sony precluded a finding of constructive knowledge on the part of the defendants. Since the plaintiffs were likewise unable to demonstrate that the defendants had actual knowledge of specific infringing activity at a time when they had the ability to prevent it from occurring, no contributory infringement could be found. Similarly, the defendants were not shown to have the right and ability to supervise the users' infringing activity, so they could not be found to be vicarious infringers. See MGM Studios, Inc. v. Grokster, Ltd ., 380 F.3d 1154 (9th Cir. 2004).

Supreme Court Decision

When the case finally reached the Supreme Court, both parties once again argued for different interpretations of Sony. The defendants suggested that the Supreme Court should read the case broadly, as the Ninth Circuit had, and find that even a relatively small amount of noninfringing use of a product would qualify as being “capable of substantial noninfringing uses.” The plaintiffs, however, argued that “substantial” implies that a greater percentage of the use must be for noninfringing purposes for the product to fall under the protection of the staple article of commerce rule described in Sony, and that the defendants could therefore be considered to have constructive knowledge of the direct infringement.

The Supreme Court concluded that Sony was factually distinguishable from this case in that it dealt with imputing intent, based upon a product's uses, to a defendant that could not be shown explicitly to have intended the acts of direct infringement. Because there was some evidence of the defendants' intent to cause direct infringement with their software, including statements and actions directed to promoting infringement, there was no need to decide whether intent could be imputed based on the design and functionality of the product itself. The Court therefore refused to determine the appropriate application of the Sony rule, and instead proceeded to apply a different theory of indirect liability, namely inducement of infringement.

According to the Supreme Court, “[o]ne infringes contributorily by intentionally inducing or encouraging direct infringement.” No. 04-480, slip op. at 12. Though the lower courts had assumed that in the absence of specific knowledge of infringement Sony should always apply to bar liability if the product is capable of substantial noninfringing uses, the Court made it clear that Sony “did not displace other theories of secondary liability” and “was never meant to foreclose rules of fault-based liability derived from the common law.” Id. Accordingly, in much the same way that the Sony Court had taken the staple-article of commerce rule from 35 U.S.C. '271(c) of the patent laws, Section 271(b), which codified the inducement rule, was adopted here. As expressed by the Court, “one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties.” No. 04-480, slip op. at 19.

Having decided to analyze the defendants' liability in terms of an inducement theory, the Court proceeded to detail several examples of evidence of unlawful objectives that tended to prove that there was an intent to induce infringement. In addition to the evidence of solicitation of users through advertising and other methods by implying that copyrighted material could be downloaded using the defendants' software, three other important types of evidence were noted. First, the defendants could be shown to have directly targeted a market for copyright infringement by attempting to replace Napster. This was demonstrated by, among other things, defendants' internal memos making reference to such a goal and the fact that Grokster's name sounds like Napster. Second, the fact that neither defendant attempted to design its software to prevent the transfer of copyrighted material buttressed the inference of an intent to foster infringement. Finally, since the defendants make more money based on the number of users they have, their business model demonstrates that the more infringers are using their software, the more money they will make. Though the Court clearly states that much of this evidence alone would be insufficient to demonstrate unlawful intent, the record as a whole allows such a conclusion. Since the defendants can be shown to have had a “purpose to cause and profit from third-party acts of copyright infringement,” they may be held liable for those acts of infringement upon the distribution of the product.

The Supreme Court vacated the lower court's finding of summary judgment for the defendants and ordered reconsideration of the plaintiffs' motion for summary judgment based on an inducement theory of liability. Based on the Court's analysis of the evidence in support of inducement liability, it appears likely that the plaintiffs' motion will be granted.

Possible Implications

A close examination of the Supreme Court's Grokster opinion provides some indication of how the inducement theory may be applied to future cases. Notably, Sony is still applicable, and if a product is not “capable of substantial noninfringing uses,” then intent may be imputed and there is no need to resort to the inducement theory. However, since Sony was only addressed in the concurrences, the exact meaning of the rule remains an open question. Therefore, it can be expected that the inducement theory will be employed by plaintiffs, unless an accused product clearly has no potential noninfringing uses.

To prove inducement of infringement, a plaintiff must prove that a defendant had an intent to cause infringement, distributed a device suitable for infringing use, and that infringement actually occurred. There seems to be nothing novel about proving that infringement occurred or that a device is suitable for infringing use, so the important question is how future courts will determine if a defendant had an intent to induce infringement.

The Supreme Court stated that there must be clear expression or other affirmative steps indicating an intent to promote direct infringement to support a finding of liability under an inducement theory. Once such evidence has been accepted, however, more ambiguous evidence may be used to support a finding of intent. Stronger evidence is needed than simply knowledge of infringing potential or “ordinary acts incident to product distribution, such as offering customers technical support or product updates,” but these factors may be utilized to support a finding of intent if, in combination with other statements or actions, they demonstrate “purposeful, culpable expression and conduct.” The standard for finding clear expression or affirmative steps is not clearly articulated, although the threshold does not appear to be that difficult to reach. Evidence of the product's characteristics or potential for infringing use is obviously insufficient, but it is not necessary to prove that a message was sent out to users that encouraged them to infringe. In fact, it is suggested in the opinion that an internal memo describing the unlawful objective would be sufficient as a clear expression, while targeting a market of known infringers would qualify as an affirmative step. No. 04-480, slip op. at 21-22 (explaining that intent to induce infringement may be proven by active steps that demonstrate such a purpose, even in the absence of consumer contact). Once clear expression or affirmative steps have been found, even product design decisions or the defendant's desire to attract customers may be used to support a finding of inducement.

Once a clear expression or affirmative step is found, there will typically be sufficient other evidence to support a finding of inducement. If a product can be used to infringe, the fact that it was not designed to suppress this capability will be questioned. If the defendant makes more money because of the infringement, the profit incentive will be questioned. Future findings of liability for inducement will likely depend on how the courts interpret the finding of a clear expression or affirmative step toward fostering infringement. Many arguments will likely revolve around whether a particular act of a defendant will qualify under this vague standard.

It is possible that the courts will interpret Grokster narrowly and require a strong showing of a clear expression or affirmative step toward fostering infringement. However, Grokster suggests that virtually any statement or action related to copyright infringement, whether made directly to consumers or internally, may be considered to demonstrate an intent to promote infringement.

By avoiding the Sony safe harbor rule, and instead deciding Grokster under a theory of inducement to infringe, the Supreme Court has left open more questions than it answered. It remains unclear what qualifies as “capable of substantial noninfringing uses” once a defendant is within the protection of Sony. Also unclear is what is required to stay within the Sony rule and avoid a detailed analysis of business plans and product design decisions in finding liability for inducement.