On June 27, 2005, the U.S. Supreme Court issued an opinion in the case of Metro- Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., unanimously holding that a party that distributes a product with the goal of advancing the use of the product to infringe copyright can be held liable for the infringing acts of its users. The case involved a group of copyright holders against distributors of free software products that allow users to share digital files – largely copyright protected audio and video files – directly with other users through a decentralized "peer-to-peer" computer network.
Below, the Ninth Circuit Court of Appeals held that respondents could not be held liable for third-party users’ copyright infringement because their software products have substantial non-infringing uses. In coming to this conclusion, the Ninth Circuit relied Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417 (1984), where the Supreme Court held that, despite the knowledge that their products may be used to infringe copyrights, VCR manufacturers can not be held liable for infringement by VCR users because the products have "commercially significant non-infringing uses" (e.g., recording programs for more convenient viewing, or "time-shifting").
In the Grokster case, the Ninth Circuit found that the potentially significant legal uses of respondents’ software products (e.g., authorized sharing of files) similarly shielded the respondents from liability for copyright infringement by the users of their software. Additionally, due to the decentralized exchange of files between users, the Ninth Circuit found that respondents did not materially contribute to, or have knowledge of their users’ particular instances of infringement.
The Supreme Court overruled the Ninth Circuit, holding that it had not properly applied Sony to the facts in Grokster. Acknowledging the tension between protection of intellectual property and development of innovative technologies, the Supreme Court rejected the Ninth Circuit’s position that Sony automatically shields sellers from liability for the infringing activities of their customers whenever their products are capable of "substantial lawful use." The Supreme Court held that a seller of such products will be liable for contributory infringement where a "purpose to cause and profit from" thirdparty infringement is shown by "clear expression or other affirmative steps" of the seller to foster such infringement.
Key to the Supreme Court’s decision was the finding that respondents took affirmative steps to actively promote copyright infringement by their users. The Court specifically noted that respondents targeted their software to former users of Napster – software that was used largely to illegally distribute copyright protected music files – and that respondents made no attempt to diminish copyright infringement by their users. It also found that respondents’ business model, which generated income solely though the sale of advertising directed at its users, was dependent upon high-volume, unauthorized sharing of copyright protected files.
The final disposition of Grokster has yet to be determined, as the Supreme Court returned the case to the district court for reconsideration of the plaintiffs’ motion for summary judgment. While the full impact of the Supreme Court’s decision is not yet clear, it is apparent that technology companies may not always rely on Sony as impenetrable defense against claims of contributory infringement. Moreover, since the legal standard of contributory negligence established by Grokster has the potential to be applied in various factual scenarios, technology companies need not be engaged in precisely the same business to be potentially placed at risk.
Shaun E. Ryan contributed to the preparation of this advisory.
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