United States: File-Swapping Services May Be Liable for Inducing Copyright Infringement, Supreme Court Rules

• Lower Courts Had Ruled Defendants
• Were Not Liable
• Supreme Court Reverses Ninth Circuit
• Implications of the Decision
• What Companies Should Do 3

Metro-Goldwyn-Mayer Studios Inc. v. Grokster Ltd., decided by the United States Supreme Court yesterday, focuses on whether companies that distribute peer-to-peer software allowing the sharing of digital media files over the Internet may be held liable for contributory or vicarious copyright infringement. Plaintiffs, the major motion picture and recording companies and a group of songwriters and music publishers, sued Grokster and StreamCast, which distributed free peer-to-peer software. Unlike the former Napster system, the Grokster and StreamCast systems do not have a central indexing system for files, but use either a decentralized or "supernode" indexing system in which no files or indexes reside on servers controlled by the software providers. The defendants earn substantial revenue from advertising to those who download the software, and it was conceded that many of those who download use the software for infringing purposes.

Both the district court and Ninth Circuit found that defendants were not liable for contributory or vicarious infringement. Contributory negligence requires the plaintiff to show that the defendant knew of and materially contributed to another's infringement of copyright. On the knowledge issue, the Ninth Circuit applied the important 1984 Supreme Court decision in Sony Corp. of America v. Universal City Studios, Inc. (Sony-Betamax). Sony- Betamax held that a manufacturer of home video recorders was not liable for contributory copyright infringement because the VCR could be used for legal as well as illegal copying. The Ninth Circuit found that the defendants. software was capable of substantial or commercially viable noninfringing uses. The Ninth Circuit, based on its Napster decision, found that the defendants could not be charged with constructive knowledge of infringement (because their software had substantial or commercially viable noninfringing uses) and, thus, they could only be liable if they had knowledge of specific infringing acts at a point where they could prevent the infringement. The court also concluded that the defendants did not materially contribute to users' infringements, and specifically declined to find that their peer-to-peer technology was designed to evade liability. It held that defendants did not commit vicarious infringement because they could not block access to those who used the software for infringement and, thus, did not have the "right and ability to supervise" illegal file-sharers.

The movie and record companies obtained review in the Supreme Court. Petitioners argued that Sony-Betamax did not provide a safe harbor because Grokster and StreamCast encouraged and assisted in (i.e., induced) users' infringements and because their software lacked commercially significant non-infringing uses and could have been designed to prevent infringing uses. They contended that defendants were liable for vicarious infringement because they profited directly from infringement and disabled legal and practical mechanisms to prevent infringement.

The respondents argued that Sony-Betamax's "significant noninfringing uses" rule controlled and that technology need not be commercially viable to be protected by that rule. They contended that imposing liability on the basis that a product could be made more "infringement-proof" would threaten investment in innovation and give copyright owners a veto over new technologies. Finally, they contended that any changes in the copyright law arising from peer-to-peer technology should come from Congress, not the courts.

In a unanimous decision announced June 27, the Supreme Court reversed the Ninth Circuit's ruling absolving Grokster and Streamcast of liability for distributing the current versions of their software. Applying an inducement doctrine borrowed from patent law, the Court held that a distributor of file-sharing software or a device who intends that its product be used for infringement, as shown by clear statements or by "other affirmative acts taken to foster infringement is liable for resulting acts of infringement by third parties". The opinion of the Court (by Justice David Souter) adopted an explicit "intentional inducement" theory, under which distributors of technology who intend that it be used to infringe may be held liable for the infringement of their users.

However, the Court declined to modify the Sony-Betamax rule, even though two concurrences debated whether Sony- Betamax should be revisited in light of changes in technology or reliance by manufacturers and whether the plaintiffs would be able to prevail under the Sony-Betamax test on remand.

To counterbalance Sony-Betamax's "staple article of Commerce" doctrine, borrowed from patent law, the Court found that the patent law doctrine of inducement should also be adopted in copyright law. Inducement, the Court held, may be proven from messages directed to users of software, but can also be shown from internal communications among a defendant's employees showing that the defendant distributed the software with the intention that it be used for infringement. The Court stated that it was not imposing liability for a state of mind, but for distribution of devices that permit copyright infringement, accompanied by "a purpose to cause and profit from third-party acts of copyright infringement". The opinion asserts that adoption of an inducement doctrine will not compromise legitimate commerce or lawful innovation, as liability cannot be based solely on a defendant's mere knowledge of infringing potential or actual uses, or on acts which are common to product distribution, such as providing technical support or product updates.

The Court found strong evidence that StreamCast and Grokster intended that their peer-to-peer software be used for infringement and that they actively encouraged users' infringement. Both defendants sought to capture the base of Napster users after the latter service was enjoined, with the intent of having users use the software to exchange copyrighted files. Both defendants adopted a business model in which revenues from the sale of advertising increased when users of the software exchanged copyrighted works. Also, in light of the "other evidence of intent," the Court found it significant that neither company tried to filter or stop the sharing of copyrighted material despite receiving many complaints of infringing uses. The Court found the argument for imposing indirect liability to be strong, in the face of the volume of infringing downloads, the loss of respect for copyright among individuals, and the difficulty of prosecuting individuals for misuse of peer-to-peer software.

The Court distinguished Sony-Betamax, because no evidence was presented of Sony's intention to promote infringing uses, and the only basis for possible indirect liability was the knowledge that the product is used to infringe by some, but not all, customers. The Court found that the Ninth Circuit had erred by reading Sony-Betamax as barring secondary liability as long as a device could be used for noninfringing purposes. Where evidence shows that the defendant knew that its device could be used for infringement, and actively promoted infringement, Sony-Betamax does not preclude liability. The Court took care, however, to state that it was not considering a change in Sony-Betamax . It also appeared to reject an argument advanced by petitioner MGM that contributory infringement liability could be premised merely upon failure to take affirmative steps to prevent infringement, if a device is capable of substantial non-infringing uses.

Two concurrences (by the authors of the majority and one of the dissenting opinions in the Court's last copyright case, Eldred v. Ashcroft) showed an internal debate within the Court regarding whether Sony-Betamax should be reaffirmed or modified. Three justices (Ruth Bader Ginsburg as author, William H. Rehnquist, and Anthony Kennedy), suggested that the Ninth Circuit's understanding of Sony-Betamax was in error, and that to obtain summary judgment a defendant invoking Sony-Betamax must present convincing proof that a product has a reasonable prospect that it will develop substantial or commercially significant noninfringing uses. Three other justices (Stephen G. Breyer as author, John Paul Stevens, and Sandra Day O'Connor) wrote that the evidence presented by Grokster and StreamCast's case was sufficient to meet the Sony-Betamax standard. This concurrence suggested that Sony-Betamax had helped to encourage development of new technology and that the benefits to copyright owners that may follow a modification of Sony- Betamax would not outweigh the chilling effect of the change on technological innovation.

Our preliminary view of the Grokster decision is that the majority opinion is a balanced ruling that emphasizes the importance of holding culpable defendants liable for inducing massive infringement without curbing innovation or imputing intent to defendants who simply distribute technology that is used to infringe.

The explicit holding in Grokster is quite narrow. The decision erases the Ninth Circuit's sweeping interpretation of the Sony- Betamax defense and adopts an inducement theory drawn from several lower court decisions to deal with the issue. Dictum in the decision will likely spur skirmishing for years to come in the lower courts. Although the Supreme Court has made clear that the petitioners should win on remand under an inducement theory, the debate between Justice Ginsburg and Justice Breyer regarding proof required to qualify for the Sony-Betamax defense will arise in other cases. Furthermore, the decision does not specifically address the status of design decisions, the balancing of future uses versus existing uses, or vicarious liability claims under Sony- Betamax.

Nonetheless, the decision does provide clarity regarding the continued viability of the Sony-Betamax defense, as well as the outer limits of the defense. The Supreme Court's ruling makes clear that distributing a product that is used to infringe copyright does not trigger liability for contributory infringement and that, absent evidence of intent, defendants are not required to take affirmative steps to stop infringing uses of their products. The Supreme Court took particular care to limit the scope of the decision and to ensure that it would not be interpreted in a manner that would hinder innovation. In particular, the Supreme Court modified its discussion of the evidence of inducement by including footnote 12, which clarifies the limited reach of the decision. In addition, Justice Breyer in his concurrence (joined by Justice Stevens and O'Connor) spent significant time discussing how the Sony- Betamax decision remains valid and does not interfere with technological innovation.

Like the Sony-Betamax decision, the Grokster ruling sets out a clear holding, but applies it to an unusual, very specific set of facts. The most significant fact that the Court emphasized - that the defendants set out to take over Napster.s market in infringing file-swapping software - is highly unusual and will not arise in virtually any other case. The principle that distribution with intent to promote use of a product to infringe copyright triggers contributory liability is a much broader one, and will be tested in other contexts where intent is far less obvious.

The Grokster decision suggests that companies that distribute products that are likely to be used to infringe copyright would be well advised to undertake compliance programs relating to advertising and marketing materials, product manuals, and training of management, board members, product development teams, and customer support personnel. While this effect of the decision may be to increase costs and chill some types of innovation by technology companies, it may also prompt somewhat greater care on the part of companies to avoid encouraging infringing use of their products.

Grokster provides limited guidance apart from its particular facts on what type of activities will trigger "inducement" liability. Companies will need to await further decisions by lower courts interpreting Grokster to provide further guidance on the most advisable compliance measures.

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