United States: Napster and Hollywood: Controlling Intellectual Property in an Age of Peer-to-Peer File Sharing and Digital Video Recorders

Summary: The Internet poses significant challenges of piracy to the movie and television industry. Napster has provided a preview of the problems awaiting these industries as broadband becomes more available. To avoid these problems, the industries need to adopt coordinated strategies of public relations, enforcement of existing laws, changes to the law and technological protection working with the consumer electronics manufacturers.

The increasing availability of broadband access to the Internet means that Hollywood now faces online piracy risks similar to those faced by the music industry. Broadband through satellite, DSL or cable modem significantly increases the risk of unauthorized distribution of movies and television programs since the size of digital files of movies and television programs are too large to effectively download through dialup connections. These industries have begun to see the risks which they will face in the future: digital versions of movies are available soon after their release and are traded on some of the existing peer to peer networks. Yet the size of these file has limited the practical risk of widespread piracy. Nonetheless, a new compression technology (like MP3 was for musical works) or the increasing availability of broadband will remove this practical constraint. The movie industry has already fought several companies that made movies available for $1 over the Internet, Movie88.com and Film88.com. Both sites were ultimately shut down by the Motion Picture Association, the international arm of the Motion Picture Association of America (MPAA) (the industry organization that represents the major U.S. motion picture companies, including Sony, Twentieth Century Fox and Universal).¹ Both sites were based in other countries: Movie88.com was in Taiwan, and Film88.com in Iran, but the MPA was able to pressure their ISPs (in the case of Movie88.com the Taiwanese government also intervened) who cooperated in shutting down the sites. The television industry has been able to shut down several sites that broadcast network television over the Internet, one in Canada and one in Southern California. These sites illustrate the growing problem with piracy.

Digital versions of movies and some television programs are available on DVDs. Until recently, the DVDs were secure due to the Content Scrambling System encryption system, but it was broken due the alleged carelessness of one of the consumer electronics manufacturers who used it. The introduction of widespread digital broadcasting and the increased use of digital video recorders (DVR) will broaden the availability of digital versions of these works. DVRs permit the digital recording of programs (whether broadcast in digital or analog format) and frequently have automated program schedules which enables the customer to record programs easily. The risks arising from DVRs has been spotlighted by the actions of SONICblue, a DVR manufacturer, which enabled the "sharing" of programs over the Internet between owners of its ReplayTV DVRs. In contrast, the other leading manufacturer of DVRs, TiVo, has a system that encrypts the programs throughout the process, so even access to the hard drive of TiVo devices upon which the copies are stored will not permit the copies to be viewed on another TiVo device.

The movie and television industry brought suit in October 2001 against SONICblue, the owner of DVR technology known as ReplayTV, and alleged that SONICblue’s DVR technology violates the industry’s copyrights.² Consumers rallied behind SONICblue, even going so far as to file their own suit. Five consumers, represented by the Electronic Frontier Foundation, sued seeking a declaration that their use of the ReplayTV technology does not infringe the television industry’s copyrights.³

The music industry’s crusade against Napster and its results contain valuable lessons for the movie and television industries. This article will explore the lessons to be learned from Napster, and provide potential approaches for dealing with these issues, both legal and practical.

Before seeking the lessons of the music industry’s fight against Napster and other file sharing services, it is useful to review the record. The music industry first had to contend with MP3.com: in January, 2000, MP3.com launched its myMP3.com which permitted users of the service to "play" songs which they "owned" from large servers maintained by MP3.com. Unfortunately for MP3.com, it never received permission from the record labels (owners of the copyright in the sound recording or the music publishers, owners of the copyright in the underlying musical composition) to make these copies and provide the service. The music industry was able to obtain swift injunctive relief and the cases were settled with most copyright owners for payments exceeding $165,000,000 not including additional royalties (the settlements were confidential). These settlements may also have been encouraged by the much more serious threat posed by peer to peer systems such as Napster and Scour.com.

Napster was one of the most well-known of the peer-to-peer file sharing services available on the Internet. It enabled billions of songs, compressed into MP3 format, to be transferred from one Napster user’s computer to another (the court estimated that 10,000 files were transferred every second). Peer to peer services had been available for a long time, but Napster dramatically increased the use of these services by consumers because of the ease of use that the Napster service provided through its centralized index of the ever-changing music files currently available on the system.⁴ Unlike MP3.com,⁵ Napster did not store any files on its servers and, thus, Napster did not directly infringe any of right of the copyright owner: the users were the direct infringers. Since locating and pursuing individual users was not a feasible solution (tracing users was difficult and they were customers of the music industry), the music industry adopted a strategy of challenging the enabling companies such as Napster and Scour.com.

The music industry and the movie industry were able to swiftly defeat Scour.com, forcing the company into bankruptcy. However, Napster proved a more difficult antagonist. The record companies and the music publishers sued Napster on the basis that Napster was both a contributory infringer (Napster knew of its users’ infringement, and materially contributed to it) and a vicarious infringer (Napster had the ability to control the infringement, but did not do so and received a direct financial benefit as a result).⁶ After preliminary skirmishes, the record labels and music publishers were successful and obtained a very broad preliminary injunction. Napster raised a number of defenses of first impression which could have proved dangerous. However, the egregious nature of Napster’s behaviour and the record of Napster’s intentions to undercut the recording industry persuaded the district court to reject these defenses. The defenses, which may occur in future lawsuits, were: Napster was entitled to safe harbor protection under the Digital Millennium Copyright Act, and Napster was not liable because the actions by the users were not infringement either based on the exemption in the Audio Home Recording Act or based on a fair use theory.⁷ However, the problem with a purely legal enforcement strategy were emphasized when the injunction was stayed for almost six months by the Ninth Circuit. Ironically, the Ninth Circuit went on to largely affirm the district court’s decision, yet the delay was very harmful to the music industry. In fact, the major challenge presented by Napster was not its legal theories, but the creation of the expectation in many consumers that digital means free. As noted by one RIAA lawyer, consumers who would never consider walking out of record store with a CD that they had not purchased had no compunctions about obtaining MP3 files for "free" over Napster. One of the most serious failures of the record industry was to effectively combat this growing expectation.

As the lawsuit progressed, Napster’s users dwindled. After the injunction was upheld by the Ninth Circuit, the district court imposed very strict requirements upon Napster. The court essentially required Napster to filter out the transfer of any unauthorized works of the plaintiffs on its system.⁸ Napster itself shut down its service in order to develop an effective filter as well as its fee based service, but it has never re-opened. In March of 2002, Napster laid off a number of workers and Bertelsmann (the company that owns BMG) suspended its plan to buy the rest of Napster and then agreed to buy it at a reduced price. Napster declared bankruptcy in June 2002,⁹ and, at the time of this writing, Napster, with the help of its creditors, is planning to auction off its assets.¹⁰

Napster had difficulty obtaining the necessary licenses to launch its fee-based service.¹¹ Ironically, these difficulties led to problems for the recording industry instead of Napster.

As Napster was attempting to launch its own fee-based service, the music companies coalesced into two different groups, each of which started a joint venture for online distribution of that group’s copyrighted music: Sony and Universal began Pressplay, and BMG, EMI, Warner, RealNetworks and Zomba records began MusicNet. Napster had entered into a distribution deal with MusicNet, but the agreement prohibited Napster from contracting to secure licenses from either Pressplay, Sony or Universal. It also apparently prevented Napster from doing individual deals with Warner and EMI without MusicNet’s consent.¹²

Napster brought this problem to the court’s attention in October 2001. Napster argued that MusicNet and Pressplay were entering into horizontal price-fixing combinations by setting wholesale, and possibly retail, prices for digital distribution of recordings. Napster also argued the music industry engaged in vertical foreclosure of the digital music market, by refusing to grant licenses to independent file sharing services and imposing burdensome license terms on those to whom it did grant licenses. The court remarked at the hearing that this "looks bad, sounds bad and smells bad."¹³

Shortly after this hearing the Antitrust Division of the United States Department of Justice sent out civil investigative demands regarding whether the companies intended, through their copyright rights, to control content and distribution channels for digital music.¹⁴ A short time later in January 2002, despite their prior unflinching pursuit of Napster, four of the five companies that brought suit against Napster asked that the lawsuit be suspended.¹⁵

The music industry achieved great legal success in their case against Napster: they managed to effectively shut down the entire service. And the record companies have also been able to parley their success with Napster against other music file sharing services without having to go through litigation.¹⁶ Yet this very success demonstrates the inadequacy of a legal enforcement strategy alone. Due in part to the novelty of the legal issues involved, the case dragged on for almost sixteen months before the Napster service was shut down. Moreover, Napster was a "hybrid" service, not a pure "peer to peer" service: it provided a central data base of currently available songs. Most "peer to peer" services, such as KaZaA and Morpheus, are completely decentralized and do not have such a centralized database. Consequently, it is not clear that decision in Napster will apply with equal force to "pure" peer to peer networks.

And the battle with peer to peer networks continues.¹⁷ Many Napster users have shifted to other file sharing services using software from KaZaA, Grokster, Morpheus, Freenet and similar software (these companies all offer software that allows peer to peer file sharing without a central server).¹⁸ Music industry associations and companies have sued these entities, in both the United States and the Netherlands. Although the U.S. suits have met with some success,¹⁹ it is not clear that the music industry will ultimately be victorious. The Dutch music rights organization, Buma Stemra, suffered a setback in its suit against KaZaA when a Dutch appeals court overturned a lower court decision and allowed KaZaA to continue to distribute its software program.²⁰ The Dutch decision relied largely on a United States Supreme Court case, Sony Corp. of America v. Universal City Studios, Inc.,²¹ which defended manufacturers of video cassette recorders from liability for contributory infringement on the basis that such VCRs had "substantial non-infringing uses": the "time-shifting" of television programs by viewers. It is important to note that the Supreme Court did not address the issue of whether the use of VCRs to make copies of programs for personal libraries would "tip" the balance against a finding of substantial non-infringing uses. In fact, the decision does not make clear whether the "substantiality" of the non-infringing uses needs to be a majority of the uses or simply a modest amount of the uses. Another dangerous part of this decision is its apparent approval of the ability to raise "future" non-infringing uses to supplement an argument claiming "substantial non-infringing uses" (a suggestion that the Ninth Circuit specifically approved in its Napster decision). Unfortunately, the ability to raise future uses as part of this defense could provide wide (and speculative) latitude in arguments for this defense.

One of the most important effects of the delays in the Napster case has been the growth in the belief by consumers that digital music, because it is digital, should be free. This belief has grown in part because until recently the music industry did not provide a practical "legitimate" way of obtaining digital music. Even now, the commercial services are inconvenient to use and do not provide the flexibility desired by consumers.

And the record companies have suffered significant damage to their reputations. The combination of their relentless pursuit of Napster, and their failure (until recently) to establish legitimate alternatives as well as their reluctance to license to third parties (other than their joint ventures) have damaged the legitimacy of their cause. The public viewed Napster as revolutionary and as an outlaw.²² Many consumers viewed Napster as providing a simple, technologically sophisticated way to enable consumers to do what they had done for years – copy music they bought in the store and share it with friends and acquaintances. The suit against Napster was viewed as the recording industry’s attempt overreach and extend the limits of its copyrights, in order to maintain control over an outdated distribution model.²³ Senator Orrin Hatch, a songwriter and musician, clarified this point of view: "’I do not think it is any benefit for artists or fans to have all the new, wide distribution channels controlled by those who have controlled the old, narrower ones. This is especially true if they achieve that control by leveraging their dominance in content or conduit space in an anticompetitive way to control the new, independent music services that are attempting to enhance the consumer’s experience of music.’"²⁴ Unfortunately, the music industry did not effectively state the obvious: Napster enabled sharing music with friends as well as hundreds of thousands of strangers and threatened to undermine the economics of the music industry. Despite the illogic of their position, the music industry failed to convince consumers that such "sharing" had very direct negative effects on the artists the consumers professed to support. Some consumers even stated that trading MP3 files of songs does not really hurt the artist, because the money spent on the CD will likely all go to the record company, and not the artist.²⁵

This negative reaction has been extended to other legal battles by content owners. The MPAA’s fight against hackers who would distribute DeCSS, the de-encryption software for DVDs, has largely been successful²⁶ in the courts. However, many legal scholars viewed it as an attack on free speech and opposed the MPAA’s initiative. These issues have arisen in a different case involving ReplayTV. As described above, ReplayTV included a new feature permitting ReplayTV owners to share recorded programs over the Internet. In response to a lawsuit filed against ReplayTV, five individuals have sued the MPAA and entertainment companies for violating their "fair use" rights by suing ReplayTV. The Napster case has also fueled a movement by open source advocates and copyright law professors to limit or repeal the anti-circumvention provisions of the Digital Millennium Copyright Act.²⁷

What Should the Movie and Television Industries Do?

The movie and television industry are fortunate in having the example of Napster which provides guidance about the effectiveness of various strategies. Unfortunately, they also have the other legacies of Napster: consumers who believe that digital music (and maybe digital entertainment) should be free and an aroused opposition to the DMCA and other methods of protecting content. Before proposing a strategy, it is important to understand the current state of efforts both technical and legal to protect content. The following is an overview of the most important developments and potential options:

Several technological measures have been developed and are being evaluated to determine their effectiveness against piracy. The following are the most important:

• Broadcast flags. Broadcast flags are hidden signals carried on a digital television broadcast that designate, for example, that certain shows cannot be copied.²⁸ Currently, most televisions are equipped to receive analog signals, because most television broadcasts are sent in analog format. However, digital broadcasts are significantly higher in quality, but not yet widely used. The proposed solution is broadcast flags for digital broadcasts. For the flags to work, the digital television (or other reception device) would have to recognize the broadcast flag and operate according to its restrictions. This method has been approved by a private industry group, the Broadcast Protection Discussion Group (BPDG), that consists of over 70 representatives from the consumer electronics, information technology, motion picture, cable and broadcast industries. Specifically the BPDG said, in its final June 3, 2002 report, summarizing its discussions over the prior seven months, that there was "substantial agreement among the BPDG participants" that a broadcast flag is "technically sufficient for the purpose of signaling protection of [digital television] content in digital form . . . against unauthorized redistribution."²⁹ Referencing this consensus, the FCC (see discussion below) has recently issued a Notice of Proposed Rulemaking regarding use of broadcast flags for protection of digital broadcasts.
• Watermarks. Watermarks is technology that is embedded into content that can relay its copyright status and permitted uses.³⁰ Watermarks are imperceptible to consumers, but can be detected by devices, and the watermark is securely tied to the content. Watermarks also help plug what the television industry calls, "analog holes." When digitally broadcast content is delivered in encrypted format to an analog television set, it must be converted into unprotected analog format in order to be viewed. However, once the digital content is converted into this format, it is unprotected, and may be converted back into an unprotected digital version and distributed without restriction. Watermarks can help solve this problem because the watermark survives the conversion from digital to analog and back to digital again.³¹ Many companies are working towards developing watermarking technology. For example, DivXNetworks, the provider of the video compression technology DivX (the equivalent of the MP3 format for movies) has indicated that it will be teaming with the Fraunhofer Institute for Computer Graphics (one of the companies behind the MP3 format) to develop a system to protect digital video and audio from copyright violations.³²

Technological measures have had a mixed history. Until the invention of the cracking program for CSS, the CSS encryption system for DVDs worked effectively and generated only modest consumer complaints. Yet other attempts have resulted in significant consumer backlash: for example, the recently released Charley Pride CD used copy-protection technology created by SunnComm which prevented the CD from being played on a computer CD player. The complaints against these restrictions on what otherwise had been normal use of a CD were widespread and very vocal.³³ In addition, some commentators appear to believe that any measure that restricts "personal copying" violates "fair use" rights even if the absence of such measures could result in widespread piracy (despite frequent reference to "fair use" rights, it is important to remember that, legally, fair use is a defense to copyright infringement, not a "right"). On the other hand, even technology companies opposed to government mandated copying controls have admitted that once content is captured in "unprotected" form, it can never be "put back in the ‘bottle’ and protected against copying on the Internet"³⁴ (from Intel’s letter to Senator Hollings).

This year has seen a dramatic growth in legislative and regulatory efforts. The most important measures are summarized below:

• Consumer Broadband and Digital Television Promotion Act (formerly the Secured Systems Standards and Certification Act) (S. 2048). Introduced by Senator Hollings in March 2002, the goal of this bill is to provide for private sector development of security system standards and encoding rules to protect digital content, promote broadband, and transition into digital television. The bill contemplates that the standards developed by the private sector would then be implemented and enforced by federal regulations. The bill requires any device that can record, receive or store copyrighted digital information to comply with the standards and that any rules be encoded into digital works such as DVDs, CDs and others. The bill expressly requires that the encoding rules should "take into account the limitations on the exclusive rights of copyright owners, including the fair use doctrine." The bill would also prohibit the application of standard security technology to "prevent a lawful recipient from making a personal copy for lawful use in the home of programming at the time it is lawfully performed . . . ."³⁵ The bill also allows the private sector to change the technology that conforms to the standards (upon appropriate notice, if possible) if the technology has been compromised, or if technological improvements warrant upgrading the technology.³⁶
• Anticounterfeiting Amendments of 2002 (S. 2395). This bill introduced by Senator Biden in April 2002, would revise existing law to prohibit trafficking in (a) counterfeit labels affixed on, or designed to be affixed on sound recordings, computer programs, movies or other audiovisual works, or documentation or packaging, or (b) illicit physical authentication features affixed to or embedded in, or designed to be affixed to and embedded in any of the above. The penalty is a fine or imprisonment up to 5 years.³⁷ In addition, the bill would give copyright owners injured by violations of the bill a private right of action, and such plaintiffs could receive both money damages and injunctive relief.³⁸ This bill was just amended to cover "all" authentication features, not just physical ones.
• Berman bill (H.R. 5211). This bill would add a new section 514 to the Copyright Act, which would permit a copyright holder to engage in "self-help" against peer-to-peer file sharing services. Specifically the bill provides that copyright holders would not be liable for "disabling, interfering with, blocking, diverting, or otherwise impairing the unauthorized distribution, display, performance, or reproduction of his or her copyrighted work on a publicly accessible peer-to-peer file trading network, if such impairment does not, without authorization, alter, delete, or otherwise impair the integrity of any computer file or data residing on the computer of a file trader."³⁹ The bill would not protect the copyright holder to the extent that he or she (1) impairs the availability over any peer-to-peer file trading network of a file not containing any part of the copyright holder’s works, except as may be reasonably necessary to impair the distribution, display, performance, or reproduction of the copyright holder’s works; (2) causes economic loss to any person other than affected file traders; (3) causes more than $50 of economic loss of the affected file trader (excluding the loss involving the files that contained the copyright holder’s work(s) that were available through the peer-to-peer file trading network); (4) does not notify the Attorney General at least 7 days beforehand of the technologies the copyright holder intends to use to stop the trading; or (5) if requested by the file trader, does not provide the file trade with certain information regarding the copyright holder. The bill permits file traders to sue for the copyright holder’s knowing and intentional impairment of a file where such copyright holder has no reasonable basis to believe that the action infringes his or her copyright, and where the file trader suffered greater than $250 economic loss as a result of the copyright holder’s actions. However, the trader must first provide the claim to the Attorney General, who has 120 days to determine whether the claim is meritorious. If so, or if the Attorney General fails to respond within the 120-day period, then the trader may file suit in federal court.
• FCC Proposed Regulations on DTV Transmissions. After Congress reportedly exerted "tremendous pressure" on the FCC to "advance the availability of digital television while limiting unauthorized redistribution of content,"⁴⁰ the FCC issued a Notice of Proposed Rulemaking regarding digital broadcast copy protection.⁴1 The notice requests comments on a variety of digital broadcast copy protection issues, including whether a protection scheme is needed; if one is needed, would a broadcast flag be the appropriate method; would the particular broadcast flag recommended by the private industry group BPDG (see above), the ATSC flag, be the most robust and appropriate; and other issues.⁴²
• Attorney General Enforcement. In July 2002, a bipartisan group of U.S. lawmakers wrote to Attorney General John Ashcroft asking him to pursue cases against Internet users who download unauthorized copies of songs and other copyrighted materials. The letter also requested the Attorney General to pursue peer-to-peer filing sharing networks and peer-to-peer software providers such as KaZaA and Morpheus. The Justice Department has not yet commented on this letter.⁴³
• Proposed compulsory licensing. Some commentators have suggested imposing a compulsory licensing scheme (with respect to digital music recordings),⁴⁴ much like the statutory scheme in place for other music-related works.

Individuals from a variety of industries are very concerned about some of these proposals. Representatives from the technology industry (Craig Barrett, CEO of Intel⁴⁵), the content distribution industry (Jonathan Taplin, CEO of Intertainer, Inc.⁴⁶), and law schools (Justin Hughes, UCLA visiting professor of law⁴⁷) oppose legislation requiring a standard for encryption or digital rights management, citing among other reasons, the stifling effects that a legal standard will have on technical innovations that may quickly improve upon and outpace it. Indeed some experienced legislators, such as Senator Hatch and Senator Leahy, are not sure that legislation is the best way to handle the problem. They prefer instead to let industry develop its own standards.⁴⁸ Some legislators, such as Representative Boucher, take the opposite approach and suggest legislation clarifying the scope of fair use rights for individuals.⁴⁹

The major efforts in this area have been discussed in other sections of this article. The major cases currently are pending are a California case regarding a trade secret approach to stopping the distribution of DeCSS technology and the current case against SONICblue’s ReplayTV. Despite the unpopularity of these suits among consumers, they have proven to have an important role in an overall protection strategy.

The most effective response to these challenges is a combined approach. The content industries need to recognize that the Internet and other technologies requires a fundamental re-examination of many assumptions about their business. The failure to recognize and respond to these changes will result in substantial problems for the industry. And the period to respond effectively will not last forever. Just as the music industry learned, the most potentially pernicious legacy of the new technology is the belief that digital entertainment should be free. On the other hand, these technologies offer significant opportunities for new revenues.

A strategy that relies primarily upon enforcement will not solve the broader problems of consumer expectations. The most effective strategy will combine the following elements:

1. Authorized Distribution. The content industries need to develop their own distribution channel for digital versions of their works so that consumers have a "legitimate" alternative. They need to be careful to ensure that such distribution is not so encumbered with "technical protections" that it does not serve as a realistic alternative to the peer to peer networks. The system needs to be easy to use and have access to a broad selection of their works.
2. Public Relations. The industries also need to dispel the belief that digital versions of their works should be free. This belief is one of the most dangerous legacies of the delay of legal proceedings in Napster. Despite its illogic, it is widespread. This effort also needs to be extended to the law schools where many professors of copyright law supported Napster.
3. Enforcement. The MPAA and other companies need to continue to aggressively enforce their rights against those who would exploit the legal uncertainties in the Internet. However, they need to take care to avoid being viewed as trying to extend their control, as was the music industry in Napster.
4. Technical Protection. The industries need to focus on the role of technical protection, particularly digital rights management technology, as a major element in a coordinated plan to protect their works. Yet it must be implemented in a manner that does not prevent ease of use by consumers. And they need to recognize that such technical protections are likely to be cracked, and the industry needs to be prepared to replace them.
5. Legislation. The fluidity of the current legal environment means that legislation may play a crucial role in assisting the content industries in protecting their works. Yet, the content industries need to be realistic in what is achievable and remember that overreaching could result in legislation that is detrimental to their goal. They need to remember the truism that Congressmen have many more consumers in their districts than movie or television companies. If the industry takes a too restrictive approach, they may find themselves fighting legislation to outlaw "technical protections" or implementing broadly defined "fair use" rights for consumers.
6. Form Alliances. The implementation of many of these measures will require cooperation with other industries, such as the computer industry and the consumer electronics industry. The content industries need to work with these other industries to ensure that its proposals are viewed as reasonable and do not impose too great a burden on these other industries. Industry groups comprised of content providers and the technology industry, like the Broadcast Protection Discussion Group, can provide a forum to develop a coordinated approach. It will also offer the potential to discover and protect new revenue streams for the content industries. The failure to do so can increase risks, such as the risk created by the new functions introduced by SONICblue in its ReplayTV device.