United States: The End of Peer-To-Peer File Sharing?

In 1999 the Napster file transfer service first released software allowing internet users to engage in the mass digital distribution of copyrighted music online. Since then, so-called "file-sharing"—termed "theft" by the entertainment industry—has become a cultural phenomenon. Individuals who would not dream of shoplifting a music CD from a record store, even if they knew that they could somehow "get away with it," do not hesitate to use peer-to-peer software to download and upload large amounts of unauthorized copyrighted songs and, increasingly, motion pictures. The phenomenon is particularly acute at high schools and colleges. To say the least, this has caused grave concern among members of the entertainment industry. According to these content providers, the ability to transfer massive amounts of perfect digital copies threatens their very existence. Moreover, though early peer-to-peer software focused on the transfer of smaller music files, advances in peer-to-peer technology have fostered transfer of larger video files, raising concern in the motion picture industry as well.

Copyright law is the traditional tool by which content providers stop unlawful copying and distribution of their works. However, given the hundreds of millions of file-transfer software users worldwide, the content providers obviously cannot bring a direct copyright infringement suit against every, or even most, individual users.¹ Rather, the copyright owners have taken a different tack, seeking to hold vicariously liable the purveyors of the technology that facilitates copyright infringement. Using theories of secondarily liability, the record industry successfully enjoined Napster and similar companies from continuing to facilitate peer-to-peer transfer of copyrighted sound recordings and effectively shut down these services.²

But attempts to impose secondary copyright liability on creators of technology implicate other economic and social interests; the consumer electronics industry and information providers fear that an overly broad application of copyright law would impermissibly chill technological innovation. These companies are concerned with preserving the holding in Sony Corporation v. Universal City Studios (Sony-Betamax),³ in which the U.S. Supreme Court held that Sony, the maker of the Betamax video cassette recorder, was not liable for contributorily infringing Universal’s televised motion pictures because the Betamax was capable of commercially significant (or substantial) non-infringing uses, namely time-shifting of free over-the-air broadcasting and recording of authorized material.⁴ So-called public interest groups argue that imposing secondary liability on technology purveyors would stifle the availability of public domain works, or works transferred with authority of the copyright owners, and deprive the public of valuable works.

Against this backdrop, on June 27, 2005, the U.S. Supreme Court decided Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd.,⁵ undoubtedly the most highly publicized copyright case ever to come before the Supreme Court. Defendants Grokster and StreamCast developed and distributed peer-to-peer file trading software. While a small minority of users employed the software to trade authorized or uncopyrighted material (no more than 10 percent), at least 90 percent of the transferred files consisted of copyrighted music and motion picture files. Unlike Napster before them, the Grokster defendants did not maintain a centralized file server indexing available material available for transfer. Rather, their software allowed these indexes to be maintained on the computers of the consumers, so the defendants argued they had no continuing involvement in facilitating the infringement. Based on this decentralization of the indexing function, the Grokster defendants claimed their conduct was distinguishable from that of Napster and that, like Sony in Sony-Betamax, they were mere distributors of products capable of substantial non-infringing uses.

In October 2001, 28 motion picture studios and a certified class of 27,000 music publishers sued Grokster and StreamCast for contributory copyright infringement and vicarious liability. They argued the defendants’ software facilitated massive copyright infringement and, therefore, had no "commercially significant" non-infringing uses under Sony-Betamax. The studios also argued the defendants had actively induced copyright infringement by holding themselves out as the successors to Napster, by generating revenue from the facilitation of copyright infringement and by thwarting the plaintiffs’ technological efforts to block the exchange of copyrighted works. According to the plaintiffs, illegal file sharing on a massive scale using the Grokster and StreamCast software programs, among others, had resulted in billions of dollars in lost revenue and could ultimately threaten the viability of the music and motion picture industries. The district court, in a decision affirmed by the U.S. Court of Appeals for the Ninth Circuit, granted summary judgment for the defendants and held that under Sony-Betamax their software was capable of substantial non-infringing uses—namely the transfer of public domain and authorized works—because even 10 percent non-infringing use was substantial in light of the hundreds of millions of file transfers that occurred.⁶ The U.S. Supreme Court granted the studios’ petition for certiorari.⁷

The stakes were obvious. The entertainment industry plaintiffs believed that an adverse ruling before the Supreme Court would sanction massive infringement, leaving them with no effective legal remedies against the infringement and threatening their very existence. The defendants and many of the amici curiae,⁸ including consumer groups and technology companies, argued that imposing indirect liability on Grokster and StreamCast would chill technological innovation by introducing legal uncertainty into the product development and marketing process. According to these parties, the advance of new technologies like Apple Computer Inc.’s iPod MP3 player and TiVo Inc.’s digital video recorder would be impeded if the Court were to limit Sony-Betamax and adopt an expansive view of contributory copyright infringement.

In a victory for the content providers, the Supreme Court reversed and held the courts below had erroneously absolved the defendants of liability. Ironically, however, in light of the focus on the Sony-Betamax case by the parties and amici, the Court declined to reach the question whether the defendants’ software was capable of commercially significant non-infringing uses. Rather, in a unanimous opinion written by Justice Souter, the Supreme Court held that evidence existed showing that defendants Grokster and StreamCast had distributed their peer-to-peer software and promoted the software’s use to infringe copyright. The defendants could thus potentially be found liable for contributory copyright infringement.

The Supreme Court’s holding reflected the practical reality that the entertainment industry had premised their businesses on copyright infringement. Though the defendants and many of their amici supporters argued that classic public domain works available from sites like Project Gutenberg could be traded using the Grokster and StreamCast peer-to-peer software—though evidently less efficiently than downloading the works directly from the Project Gutenberg website itself—the clear attraction of the peer-to-peer system was the ability to download copyrighted works for free.

The Court considered "under what circumstances the distributor of a product capable of both lawful and unlawful use is liable for acts of copyright infringement by third parties using the product."⁹ The Court first held that the Sony-Betamax test of "substantial noninfringing use" applied only where a plaintiff tried to impute intent to infringe based solely on the characteristics of a defendant’s product. In such a case a defendant is not liable for contributory infringement where its product has commercially significant non-infringing uses.¹⁰ Thus, in Sony-Betamax the motion picture companies tried to hold Sony liable strictly based on the Betamax VCR’s ability to reproduce copyrighted works. However, because the Betamax was primarily used to "time-shift" free broadcast television—a fair use—the Betamax had substantial non-infringing uses. Importantly, the Court in Grokster noted that nothing in the Sony-Betamax opinion required a court to ignore evidence of actual intent to promote infringement. While evidence of such intent did not exist in Sony-Betamax, it did exist in Grokster, raising a genuine issue of material fact.¹¹

The Court cited three factors as evidence of the defendants’ intent to induce infringement of the plaintiffs’ copyrights.

First, both StreamCast and Grokster advertised their respective software programs as alternatives to Napster, which was earlier held to be a copyright infringer by virtue of facilitating the unauthorized distribution of a vast amount of copyrighted material. In other words, they essentially promoted their peer-to-peer system as the new way to infringe once Napster closed its doors. Consistent with their advertising, both companies helped users locate and illicitly download copyrighted materials. Both companies also sought to have hit copyrighted songs available through their peer-to-peer software to increase the software’s popularity.¹² Second, neither defendant attempted to develop a filtering tool or other mechanism to reduce infringing activity, though they had evidently developed tools to limit transfer of files containing computer viruses, pornography and, ironically, "spoofing" files the plaintiffs used to hinder the transfer of copyrighted material.¹³ Third, both StreamCast and Grokster distributed their software free to users and realized revenue through advertising, whose value turned on high-volume use. The record demonstrated that such use was overwhelmingly infringing.¹⁴ Importantly, the Court emphasized that neither the second nor third factors, standing alone, would suggest liability for contributory infringement. However, the existence of all three factors gave rise to a genuine issue of material fact as to contributory infringement. The Supreme Court remanded the case for further proceedings.

The Grokster opinion leaves open several significant questions. The first relates to the scope of its "active inducement" ruling. The Court did not decide what type of evidence is necessary to establish active inducement. By the terms of the Grokster opinion, mere failure to develop a mechanism to reduce infringing activity, or simply generating revenue from infringing activity, taken alone, is not sufficient to establish active inducement. But what if both those factors are present without explicit evidence of intent to promote infringement? Assuming a product distributor fails to develop filtering mechanisms and derives revenue from infringement, would that evidence, without more, be sufficient to raise an inference of intent? If not, what else, short of actual expressions of intent to infringe, will raise an inference of intent? Consumer electronics companies and anti-copyright advocates have expressed concern that the quantum of proof of actual inducement is so minimal as to threaten the development of technology. Not surprisingly, the content providers believe the Grokster opinion is carefully crafted to encourage technological development while at the same time protect copyright, which is constitutionally intended to encourage expressive works.

Equally unclear is how the Court would apply Sony-Betamax in a case in which a plaintiff seeks to infer intent to encourage infringement merely from the characteristics of a defendant’s product. The Grokster Court was obviously split. In a concurring opinion, Justice Ginsburg, joined by the late Chief Justice Rehnquist and Justice Kennedy, would have found that because the file-sharing programs were "overwhelmingly used to infringe," the software was not capable of substantial non-infringing use. Justice Ginsburg so concluded even though the number of non-infringing uses was large, since the infringing uses apparently dwarfed the non-infringing uses.¹⁵ In contrast Justice Breyer, joined by Justices Steven and O’Connor, disagreed with Justice Ginsburg and suggested that the scope and amount of user infringement in the case was comparable to that in Sony-Betamax and that, but for the evidence of active inducement, the Ninth Circuit would have correctly concluded the defendants’ software was capable of substantial non-infringing uses.¹⁶ Justices Souter, Scalia and Thomas joined only the majority opinion. Thus, application of the Sony-Betamax to similar cases remains open.

Recent changes to the Court do not clarify matters. Chief Justice Roberts has replaced Chief Justice Rehnquist, who joined the Ginsburg concurrences and suggested Sony-Betamax did not apply. However, with the retirement of Justice O’Connor, one of the justices who joined the Breyer concurrence has also left the Court. Justice Alito’s views on the subject are not known.

Questions also remain whether the Grokster result will actually assist the entertainment industry in fighting online copyright infringement. Early results are mixed. After the case was remanded to the district court, Grokster settled the case, ceasing operations. Co-defendant Streamcast has thus far continued the litigation but has announced that it will engage in settlement discussions. After the Supreme Court issued its opinion, members of the entertainment industry sent notices to a number of file-sharing companies and demanded they cease operations or face lawsuits for copyright infringement. Companies behind file-swapping programs i2hub and WinMX shut down after receiving the notice. LimeWire LLC, BearShare and others also put on notice have yet to make their decisions public. In Australia, a court ordered Sharman Networks Ltd., which distributes Kazaa, to ensure that new versions of the software filtered out unlicensed copyright material. At the same time, recent reports are that, even after Grokster, illegal file transfers have continued to increase. Existing peer-to-peer file transfer software continues to function even after companies like Grokster ceased operation. Moreover, newer peer-to-peer file transfer software has become more sophisticated, and it is not at all clear whether the distributors of such software can be held liable for active inducement under Grokster.

The entertainment industry has taken other approaches in its attempt to address the economic consequences of new technology. It has increased the number of lawsuits against individual infringers to discourage individual users from engaging in massive file transfers.¹⁷ While skeptics question whether such lawsuits will have any effect on the amount of file transfers, the industry believes that such suits, coupled with education, will discourage infringement.

Perhaps the most significant development is the entertainment industry’s attempt to encourage legitimate, commercially viable online systems for distribution of copyrighted content. The content owners and technology companies seek an accommodation in which the consumer can use technology to download content, while the copyright owner can earn a fair return for exploitation of the copyright. For example, the record industry has recently generated revenues from legal downloads from services like Apple’s iTunes, Rhapsody and similar authorized online services. More recently, the motion picture industry—whose product has been subject to increasing illegal digital downloads—has entered into agreements to permit digital download of their products. In a highly publicized agreement, Disney agreed to make its hit programs Desperate Housewives and Lost available for digital download to the Apple iPod the day after airing. Similarly, Viacom International, Inc., owner of CBS Broadcasting Inc., has agreed with Google to permit digital downloads of certain of its programming, including CSI and Survivor. Another of the great ironies of technological change is that individuals who were formerly in the vanguard of illegal file sharing have now sought to work with the copyright owners to find ways to exploit peer-to-peer software to allow legal downloads. Napster’s founder, Shawn Fanning, has started a company, SNOCAP Inc., that will attempt to foster legal peer-to-peer sharing.

The Supreme Court’s opinion in MGM v. Grokster reaffirmed the principle that entities that actively induce copyright infringement—even under the guise of technological progress—are liable as secondary copyright infringers. Although the case did not resolve all issues regarding technology, the opinion might foster a climate where the content owners and technology companies attempt to work together to find a way to exploit technological advances to the satisfaction of all parties. Indeed, after the Supreme Court decided Sony-Betamax in 1984, a period of relative litigational calm followed until the advent of the internet made widespread and private distribution of perfect digital copies possible. The recent popularity of legal download sites like Apple iTunes is a step in this direction. The motion picture industry’s recent foray into authorized digital downloads, coupled with the increasing availability of video on demand through services like Movielink, LLC, and now, on a limited basis, iTunes and Google, represent yet other attempts to exploit the internet’s ability to distribute content and to adapt existing "business models" to new technology.

Paul Devinsky, a partner in the Firm’s Washington, D.C. office, concentrates his practice on patent, trademark and copyright litigation, counseling and prosecution, and on trade secret litigation and counseling.

Robert H. Rotstein, a partner in the Firm’s Los Angeles office, focuses his practice on complex business issues related to intellectual property law, copyright law and entertainment litigation.

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