By Nathaniel Ari Long

The U.S. Supreme Court’s recent ruling in Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd.1 addressed politically charged issues of widespread copyright infringement in a manner that was both ingenious and troubling. In the music file-sharing follow-up to Napster, the Court held: “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, going beyond mere distribution with knowledge of third-party action, is liable for the resulting acts of infringement by third parties using the device, regardless of the device’s lawful uses.”2

Defendants Grokster, Ltd. and StreamCast Networks, Inc. (collectively Grokster) are distributors of Peer-To-Peer (P2P) file-sharing software, which allows users to easily share files stored locally on their hard drives. Users download and run software available from the Grokster website, www.grokster.com, which is reproduced with permission at right.

Grokster’s P2P software connects to other computers also running the software, which then provides lists of files available for download. P2P software uses no central database to track files available on the network. Instead, all of the machines on the network tell each other about available files using a distributed query approach. Thus, the central database -- the Achilles heel of the Napster system -- is no longer necessary in the new generation of file-sharing software.

Not surprisingly, however, that didn’t keep Grokster from being sued by a group of motion picture studios, recording companies, songwriters and music publishers, including Metro-Goldwyn-Mayer Studios, Inc. (collectively MGM). MGM argued that Grokster was liable for acts of copyright infringement by users of P2P software downloaded from the Grokster website. The Court, thus, was presented with the question of when, if ever, a maker of a device (such as P2P software) can be secondarily liable for acts of copyright infringement by those using the device.

The Court’s ruling reversed and remanded a Ninth Circuit ruling exonerating Grokster.3 The Ninth Circuit had invoked the rule announced in Sony Corp. v. Universal City Studios, Inc.4 Sony involved Sony’s sales of Betamax VCRs and their wide -- and purposeful -- use for recording television programming, arguably a copyright violation. The Sony Court announced the rule that a manufacturer cannot be faulted solely on the basis of distributing a device that is “capable of commercially significant noninfringing uses.”5 Relying on this standard, the Ninth Circuit affirmed a district court summary judgment order that Grokster was not liable for the infringing acts of its customers.

The Grokster Court agreed that mere distribution of P2P software, even with knowledge that it is used to infringe copyrights, would be protected under Sony.6 However, the Sony rule was not dispositive. As Justice Souter explained:

[W]here evidence goes beyond a product’s characteristics or the knowledge that it may be put to infringing uses, and shows statements or actions directed to promoting infringement, Sony’s staple-article rule will not preclude liability.7

In analyzing evidence of Grokster’s intent in distributing P2P software, the Court found three evidentiary factors particularly notable. First, Grokster aimed to capture Napster’s market of users. Second, Grokster never attempted to diminish the infringing activity resulting from the use of its software. Finally, Grokster profited by selling advertising space and, thus, had every incentive to maximize the number of users.8 The Court also discussed Grokster’s proposed, but unused, advertising messages as evidence of Grokster’s intent.9 On remand, the district court must determine if there is sufficient evidence of intent to hold Grokster liable for inducing copyright infringement by users of its P2P software.

By refocusing the secondary liability analysis on intent, the Supreme Court addressed the issue of rampant copyright infringement while ostensibly leaving companies free to develop new technologies, so long as the companies do not run afoul of Grokster’s intent standards. A contrary rule would have had an unacceptable chilling effect on innovation.

But the decision is not without its problems. By basing secondary liability on intent, the Court refocused infringement analysis on who you are and what you say, rather than the more objective Sony analysis of the technology you distribute. Technology companies will no longer be able to use certain legitimate business models or make bona fide political statements about issues of copyright protection or the music industry without running the risk that these will be used as evidence of their intent to induce infringement.

For example, Grokster’s advertising-based software distribution model was seen as evidence of its intent to induce copyright infringement. But use of such advertising is hardly unique. While ad-funded software may be annoying at times, it has a legitimate role in providing software for those who otherwise would not pay for it. The Grokster decision places the costs of copyright challenges disproportionately on companies that fund distribution through advertising and the advertisers and consumers who benefit from such software.

The Court’s opinion also restricts the ability of technology companies to engage in political debate. Many believe the music industry is delaying inevitable technological and cultural progress by attempting to squash the Napsters and Groksters of the world, rather than embracing new technology and evolving. Although technology companies are uniquely positioned to contribute to the debate on such issues, Grokster apparently restricts the views they may express.

In short, statements made on file-sharing websites could be construed as expressions of intent to induce copyright infringement. Therefore, such statements must be made via a separate outlet operated by another entity that is legally distinct from the device maker. For example, the Grokster homepage now features statements such as “Support the Artist. Buy the Record,” and “Purchase of Grokster Pro is not a license to upload or download copyrighted material. Grokster urges you to respect copyright and share responsibly.” Meanwhile, Grokster provides a link to P2P United, a separate organization that can make political statements without triggering liability for Grokster.

The second problematic aspect of Grokster stems from the realities of modern litigation. By focusing on a highly fact-intensive analysis of intent, the Court greatly reduced the possibility of resolving lawsuits at the summary judgment stage. As a result, Grokster will dramatically increase the cost of defending secondary copyright infringement claims.

The Supreme Court’s decision in Grokster was an ingenious strategic attempt to target a culture of copyright infringement while preserving technological progress. But in crafting such a clever solution, the Court may have overlooked the costs of restricting businesses based on who they are and what they say. It may also have inadvertently tipped the scales too far in favor of copyright holders by inadvertently driving up the cost of litigation. n

1 125 S. Ct. 2764 (2005).

2 Id. at 2770.

3 Id. at 2783.

4 464 U.S. 417 (1984).

5 Id. at 442.

6 125 S. Ct. at 2780 (“[J]ust as Sony did not find intentional inducement despite the knowledge of the VCR manufacturer . . . mere knowledge of infringing potential or of actual infringing uses would not be enough here to subject a distributor to liability.”).

7 Id. at 2779.

8 Id. at 2781-82.