United States: The Likely Impact of "MGM v. Grokster" (and an Australian Echo) on Technology Companies

The recent unanimous Supreme Court decision in MGM v. Grokster adds to our understanding of secondary liability under copyright law. But does it really strike the right balance between copyright protection and innovation?

The Court in Grokster considered whether companies that distribute software allowing computer users to share files through peer­to­peer networks should be held indirectly liable for copyright infringement occurring by use of that software. The peer­to­peer networks enabled by the software allow the user computers to communicate directly with each other. In particular, users locate a work on another’s computer and cause a copy of the work to be made (downloaded) by transmission from one user computer to another. The software providers did not participate directly in any acts of infringement. However, they marketed and distributed the software.

There are two generally recognized types of secondary or indirect infringement: contributory infringement and vicarious infringement. Contributory infringement occurs when a party intentionally induces or encourages direct infringement. Vicarious infringement occurs when a party profits from direct infringement while declining to exercise a right to stop or limit the infringement. The Grokster decision has its basis in contributory infringement and borrows the standard of active inducement from patent law.

The appellate decision below had granted the software distributors summary judgment based on Sony Corp. v. Universal City Studios, 464 U.S. 417 (1984). The Supreme Court’s opinion characterized Sony as follows:

Sony’s rule limits imputing culpable intent as a matter of law
from the characteristics or uses of a distributed product. But
nothing in Sony requires courts to ignore evidence of intent if
there is such intent.

Thus, the Court signaled that it was not basing its decision solely on product capabilities as in Sony.

For a party to be liable for third party infringement under Grokster, two elements must be shown. First, there must be intent to bring about infringement. Knowledge alone that infringement is occurring, however, is insufficient to find active inducement. Instead, there must be "purposeful, culpable expression and conduct." As Justice Souter writes in the opinion: "Proving that a[n inducing] message was sent out [by the alleged infringers], then, is the preeminent but not exclusive way of showing that active steps were taken with the purpose of bringing about infringing acts, and of showing that infringing acts took place by using the device distributed." Second, there must be evidence of actual infringement. In Grokster, the Court found "evidence of infringement on a gigantic scale."¹

The Court’s opinion in Grokster focuses on three "particularly notable" features of the intent evidence. First, the respondents (Grokster and StreamCast) were attempting to satisfy a demand for copyright infringement. Both respondents had sent e­mails to former Napster users inviting the users to try out the Grokster software. Second, neither respondent attempted to develop filtering tools or other mechanisms to diminish the infringing activity. In fact, StreamCast had actually turned down offers from companies who were developing software that would filter out copyrighted content. Finally, the respondents made commercial gain on advertising revenue by keeping the use of their software at high volume levels. The Court was careful to note that only the first feature on its own would be sufficient to infer intent to induce infringement. The second two elements can only be used to find intent to induce when viewed in context with other elements.

In general, the Court left untouched the standard set by the influential Sony decision. As noted in an amicus brief submitted by law professors in favor of Grokster, the Sony standard has been very amenable to summary judgment and has prevented confusion and instability in copyright.² The law professors were concerned that any reworking of Sony or any new standard introduced could become unwieldy and could lead to unpredictable results. The concurring opinion of Justices Breyer, Stevens and O’Connor, while not questioning the main holding, thoughtfully addresses the issue raised by a possible modification or strict interpretation of Sony. It thereby reveals the importance of the current Sony rule for protecting technology innovation and the difficult questions raised by any changes to it. In particular, the concurring opinion states that Sony’s "clarity allows those who develop new products that are capable of substantial non­infringing use to know, ex ante, that a distribution of their product will not yield massive monetary liability."

Even with the Sony rule preserved, technology developers must proceed with caution under the new framework for secondary liability represented by Grokster. Certainly, the marketing program and other messages to users will need to be free of suggestions or directions encouraging infringement. But the concern remains that, during lawsuits, opposing parties will conduct extensive discovery to find any evidence, no matter how small, that shows some intent to infringe. Such intent would always arguably be present if a product distributor is aware that infringement is occurring and that the ability to infringe is one attraction of the product. This awareness can become complicated by doubt as to what is "fair use." Another concern is that courts, having seen some evidence of intent, will move on to consider the difficult question of whether a product could be supplemented "with filtering tools or other mechanisms to diminish the infringing activity." As Justice Breyer’s concurring opinion argues, it is difficult for a court to balance evidence on the extent to which such tools are truly available and should be part of the duty of the designer and/or distributor. If a court requires such measures, this in effect forces additional product development — but for the benefit of copyright holders, not users. The statements in Grokster about when and how a court should consider evidence similar to the second and third categories of evidence it considered "notable," but insufficient in themselves, will have increased importance.

A September 5, 2005 decision from the Federal Court of Australia (Universal Music Australia Pty Ltd v. Sharman License Holdings Ltd) shows dramatically how a court decision may be affected by the availability of technology that is capable of diminishing infringing activity. In a 138 page decision, the court spent over 30 pages discussing evidence on available "Technological controls." Exhibiting none of Justice Breyer’s reticence, the court issued an injunction against the Kazaa file sharing system that was at issue, but in its order stated that the system would not be regarded as violating the injunction if the system were modified in certain ways. One way was to include certain keyword filtering technology that would use lists of copyrighted works provided periodically by copyright owners and would exclude the sharing of a copy of any identified copyrighted work. While the Australian case clearly has no force as precedent in the U.S., it certainly shows U.S. judges that a remedy might be fashioned that would put the judge in the position of product designer.

More importantly, the effect of a remedy such as the one in Australia is to alter the playing field against which Sony was decided. In effect the Australian court is looking beyond the substantial non­infringing use of the product to address the admittedly infringing uses. It is saying that the infringing uses must be effectively stopped, largely at the product maker’s obligation and expense, in order for the product to be acceptable. It is unclear if this would be required in all cases (for all products with an infringing use), or just in those cases where additional facts of contributory or inducing infringement are found.

A key factor in many new computer products is the ability to "move" information to new locations for storage and /or performance (display or listening). Where the works moved are copyrighted and all or a substantial portion of the work is involved, absent fair use or authorization, an act of infringement may occur (because the original copy persists). Technology developers and their investors need to make decisions based on the Grokster opinion. They are now forewarned that evidence of overt intent to encourage infringement will lead to a costly and possibly losing battle over the legitimacy of a product that enables electronic files to be reproduced and/or transmitted.³ The Australian decision, adds another concern, suggesting that judicial decisions will lead technology companies to modify product designs. While the Grokster decision shows a shifting and new clarity in the minds of the Supreme Court Justices on this issue, it remains to be seen how the balance in the risk­reward analysis in the minds of technology developers and investors will be altered. Society needs the contributions of both copyright creators and technology innovators. We should hope that neither is strongly deterred from its creative efforts by the rebalancing of risks in Grokster.