Grokster and StreamCast lose in Supreme Court

Out-Law News | 28 Jun 2005 | 12:42 pm | 5 min. read

The US Supreme Court yesterday ruled that two companies providing peer-to-peer (P2P) file-sharing software can be sued for copyright infringement carried out by users of the software, because they had intended it to be used for that purpose.

Grokster's and StreamCast's “unlawful objective is unmistakable,” wrote Justice David H Souter, delivering the opinion of the court in a unanimous decision that has delighted the entertainment industry.

Background

The case dates back to 2001, when the entertainment industry filed a copyright infringement action against two file-sharing service providers – StreamCast Networks Inc., the company behind the Morpheus file-sharing software, and Grokster Ltd.

The lawsuit accused the two firms of providing the means for millions of people to illegally copy and share copyrighted music, software and films over the internet. But the claim was dismissed by the Ninth Circuit Court of Appeals in August last year on the grounds that, while the companies provide the software used by file-sharers to swap illegally-copied digital files, the software can also be used for legitimate purposes.

This followed a 1984 Supreme Court decision on Sony's Betamax video recorder. Sony had been accused of infringing TV and movie studios' copyrights. But Sony won that case because the machine had significant non-infringing uses. since recording a TV programme to watch it later, known as 'time-shifting,' was deemed to be a fair use.

Yesterday's ruling

MGM and others in the recording industry appealed Grokster's Court of Appeals victory to the Supreme Court. Many expected the case to focus on the Sony ruling, possibly even to overturn it. But the Supreme Court decided not to focus on the possible infringing and non-infringing uses of the file-sharing software. Instead, it concentrated on the actions of the Grokster and StreamCast.

It found that the Court of Appeals had made an error by interpreting the Sony ruling to mean, “that whenever a product is capable of substantial lawful use, the producer can never be held contributorily liable for third parties’ infringing use of it”.

“Nothing in Sony requires courts to ignore evidence of intent if there is such evidence,” said the Court, which then refused to consider the Sony case any further. It is enough to note, argued Justice Souter, that the Court of Appeals misunderstood the Sony ruling – "and to leave further consideration of the Sony rule for a day when that may be required."

Justice Souter continued: “We hold that 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.”

He then clarified the degree of intent necessary:

“mere knowledge of infringing potential or of actual infringing uses would not be enough here to subject a distributor to liability. Nor would ordinary acts incident to product distribution, such as offering customers technical support or product updates, support liability in themselves. The inducement rule, instead, premises liability on purposeful, culpable expression and conduct, and thus does nothing to compromise legitimate commerce or discourage innovation having a lawful promise.”

He added: "The classic instance of inducement is by advertisement or solicitation that broadcasts a message to stimulate others to commit violations."

This was the downfall of Grokster and StreamCast. Evidence showed that, unlike Sony's promotion of the Betamax VCR, the P2P companies "acted with a purpose to cause copyright violations by use of software suitable for illegal use."

The Court pointed to the two companies' efforts to supply services to former Napster users, a community that, since the demise of Shawn Fanning's original service was, in the words of Justice Souter, "deprived of a mechanism to copy and distribute what were overwhelmingly infringing files". He said this effort indicated "a principal, if not exclusive, intent on the part of each to bring about infringement."

The opinion went on to note that neither company attempted to develop filtering tools or other mechanisms to diminish the infringing activity using their software; and that with StreamCast and Grokster making their money by selling advertising space, directing ads to the screens of computers that use their software, "the commercial sense of their enterprise turns on high-volume use, which the record shows is infringing."

"This evidence alone would not justify an inference of unlawful intent," wrote Justice Souter, "but viewed in the context of the entire record its import is clear."

"The unlawful objective is unmistakable," he concluded.

The case has been sent back to the District Court which must reconsider MGM's motion for summary judgment. If MGM succeeds, the issue of damages will arise. The Supreme Court acknowledged that this will be a tricky issue due to the inexact calculation of infringing use.

Reactions to the ruling

The music industry hailed the ruling. According to Mitch Bainwol, Chairman and CEO of the Recording Industry Association of America:

"With this unanimous decision, the Supreme Court has addressed a significant threat to the US economy and moved to protect the livelihoods of the more than 11 million Americans employed by the copyright industries. The Supreme Court has helped to power the digital future for legitimate on-line businesses – including legal file sharing networks – by holding accountable those who promote and profit from theft."

There was support from the software industry too. According to Business Software Alliance President and CEO Robert Holleyman, the decision “reaffirms the need for balance between innovation and deterring piracy.”

"We are gratified that the opinion ensures that persons intentionally and actively engaged in encouraging others to infringe, 'inducing infringement,' can be held liable under the law for their acts. The application of this new standard should make a real and positive difference in combating on-line piracy," he added.

But Fred von Lohmann of the Electronic Frontier Foundation (EFF), which supported Grokster and StreamCast in the appeal, said: “Today the Supreme Court has unleashed a new era of legal uncertainty on America's innovators.”

The EFF described the decision as creating a new theory of copyright liability that measures whether manufacturers created their wares with the "intent" of inducing consumers to infringe.

It means that inventors and entrepreneurs will not only bear the costs of bringing new products to market, but also the costs of lawsuits if consumers start using their products for illegal purposes, said the EFF.

"The newly announced inducement theory of copyright liability will fuel a new generation of entertainment industry lawsuits against technology companies,” warned Lohmann. “Perhaps more important, the threat of legal costs may lead technology companies to modify their products to please Hollywood instead of consumers."

According to Peter Jamieson, General Counsel of the UK's music industry body, the British Phonographic Industry, the real significance of the judgment is that it paves the wave for the launch of legal peer-to-peer networks.

"The record industry has never been opposed to new technology," he said. "What we have been against is people taking music without permission. Unfortunately the growth of illegal file-sharing networks has acted as a disincentive for companies to invest in legal services. With the rule of law now made clear, this should allow all kinds of new legal services – including P2P – to develop and grow. That has to be good news for artists, for the record industry – and for the consumer."

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