Kazaa on Trial in Australia

March 1, 2005

You would have to be on another planet to have missed the worldwide litigation furore over the peer-to-peer file sharing application Kazaa. The widespread use of Kazaa to make available and download infringing music and movie files has made it the target of law suits by the music and motion picture industries in the US, the Netherlands and most recently Australia.

The Australian proceedings commenced in February 2004, culminating in the trial which commenced in December.[i] Final argument is expected in March 2005, and judgment some weeks after that. Weary peer-to-peer followers may ask: what’s different about this case, and why should we care in the UK what happens to Kazaa down under?

First, the Australian case is the first to put Kazaa on trial in open court, and reports from Sydney indicate that some very interesting facts are coming to light about Kazaa’s ability to control file distribution. Secondly, the Australian case will be the first to apply English law based principles of authorisation, incitement, joint tortfeasor liability and common law conspiracy in the digital environment. Whatever the outcome, the decision will have an impact on all those operating on the internet, including ISPs. Thirdly, the Australian decision will come at a time when measures to control the material available on peer-to-peer networks are technically and financially viable. This means that if Kazaa is found liable, we may see, for the first time since Napster in 2000, a court regulating the steps that a peer-to-peer provider must take to avoid piracy among its users.

Before going on to consider the legal claims and the evidence at trial, it is necessary to outline some basics about the operation of Kazaa.

Kazaa basics

Kazaa Media Desktop (KMD) is a branded software application that allows computer users to share files with one another, directly between their hard drives. A Kazaa user who wishes to make files available simply puts them in a folder on his or her hard drive named “My Shared Folder”, they then instantly become accessible to other users logged on to Kazaa.

To find a particular song, for example, a user logs on to Kazaa and then enters the name of the song into the search field. The KMD causes a list of files with that name to appear on the user’s screen, together with the username of each user on whose hard drive the file is located. The searching user can then click on the file name and it is downloaded directly from the other user’s hard drive.

No-one disputes that the KMD can be used to transfer many different types of files, some of which do not infringe copyright. However, the music industry maintains that substantial numbers of files shared via Kazaa are copyright music files that have been made available without the authorisation of the copyright owner.

In the UK and Australia, there is no question that the unauthorised copying of a song (even for personal use), and making it available to others through a peer-to-peer interface, are infringements of copyright. The act of downloading the file made available is also an infringement of copyright.[ii]

Control, monitoring and administration of network

So who is responsible for all this? Well, the KMD, together with instructions on how to use it, is available from www.kazaa.com. Most versions of the KMD are offered for free, bundled with third-party advertising.

The Web site and the Kazaa business is said to be operated by Sharman Networks Ltd, a company incorporated in Vanuatu, whose management and ownership is shrouded in mystery. The CEO and public spokesperson for Sharman, Nikki Hemming, lives in Sydney, Australia, and also controls what has been described as Sharman’s “management company”, an Australian company named LEF Interactive Pty Ltd. However, the investors and shareholders of Sharman Networks have not been disclosed.

The operation of elements of the Kazaa network is another topic that has long been shrouded in mystery. Kazaa and others have been able to agree at least that Kazaa users share files by downloading them directly from another’s hard drive. It is also agreed that search queries are passed through a set of user computers designated by the KMD from time to time as “supernodes”.[iii] The supernodes perform an indexing function, and store information about files located on user computers connected to that supernode. Routing queries through a subset of computers improves the efficiency and speed of the network. It has also been generally agreed that the search function does not operate in the same way as the previous Napster system – by routing search queries through a central server operated by Kazaa. What is not agreed is whether there are any other servers or administrative level computers operating above the supernodes that are controlled by Kazaa and which participate in some way in the operation of the network.

Sharman Networks itself has claimed not to know the details of how the software works, and to be merely a licensee of the KMD from Joltid, a software development company based in Estonia.[iv]

Distribution of licensed files via Altnet

Kazaa has a business arrangement with a company named Altnet. Altnet obtains licences to copyright works, protects them with digital rights management technology, and distributes them on the Kazaa network, coupled with a credit card payment system. Altnet has announced content deals with various independent record labels, and last year it claimed to have as many as 5,000 licensed songs in its catalogue.[v]

The search and delivery of licensed files over the network is enabled by Altnet’s patented “TopSearch” technology. The licensed files are “seeded” onto the network initially from a central server operated by Altnet. The files are then distributed between peers, but each time a file is requested by a user, there is a communication with a server that operates the payment mechanism, so that the downloading user must pay for the file.[vi]

From the user’s perspective, when search results are listed, the licensed Altnet files are accompanied by a gold icon, while other files have a blue icon. The “blue” files are available for free whereas the “gold” files are restricted, and payment is usually required to download them. Altnet has said of its technology:[vii]

Altnet’s TopSearch technology, in concert with the Kazaa Media Desktop, provides artists and content owners with a secure distribution platform using patented peer-to-peer technology. It enables them to promote their works in a secure and convenient way. Altnet files appear as gold icon files in the Kazaa Media Desktop search results and can be easily purchased using Altnet’s seamless payment gateway.

By contrast, in relation to the non-Altnet blue files, Sharman Networks has said:[viii]

the Kazaa application is not able to monitor files that users of the software exchange with each other. Kazaa has a fully decentralised architecture, which allows users to share material directly with each other. Users of the software are responsible for ensuring that when they share material, they respect copyrights, just as are users of email, photocopying machines, CD burners, and a raft of other copying technologies.

This has formed a central plank of Sharman’s defence in the US, the Netherlands and Australia.

User behaviour

Kazaa users can choose to download large numbers of files and not make any files available to others. However, Kazaa rewards users that make available a large number of files. Each user’s “participation level” is logged, and the user is rewarded with certain benefits if it maintains a high participation level. Kazaa suggests the best way to increase your participation level is to share “large and interesting files”.[ix]

In addition, with free versions of Kazaa, third party advertisers monitor each user’s internet surfing behaviour and use that information for marketing purposes. These third parties provide online targeted advertising to users,[x] with revenue being passed back to Kazaa.

The legal claims: the Betamax/Amstrad paradigm

The defendants in the Australian case include Sharman Networks, Altnet and key Sharman and Altnet managers. The copyright claims in the Australian case are based on the defendants:

(1) authorising users to infringe copyright;

(2) entering into a common design for procuring and directing users to infringe copyright; and

(3) conspiring to develop, promote and distribute software designed to download music for which they paid no licence fees.[xi]

The concepts of authorisation, common design and common law conspiracy derive from UK law. The Australian law on these concepts starts from the well-known decision of the House of Lords in CBS v Amstrad.[xii] In that case, music copyright owners had commenced proceedings against the makers and sellers of double cassette recorders which were used by home users to make copies of copyright protected cassettes. They complained that the sale and advertising of double cassette recorders encouraged users to infringe copyright, and argued that Amstrad and Dixons (the sellers) were liable for those infringements either because they authorised them, because they acted in a common design with the users, or because they procured the infringements.

The House of Lords held that Amstrad and Dixons were not liable for infringements by home users, under any of these bases of liability. Essentially, while the House of Lords accepted that in certain circumstances a person could be liable for procuring infringements and for acting in a common design to infringe, that was not the case here. The House of Lords noted that, in the case of Amstrad, once a model was sold, Amstrad “had no control over or interest in its use”.[xiii] Later cases[xiv] have confirmed that the tort of incitement by procuring another to infringe copyright is available, and also that whether incitement or joint tortfeasor liability is established depends on the particular facts of each case.

In the US, the Supreme Court reached essentially the same result as the House of Lords, but by a different route. In 1984, the Supreme Court considered the liability of the sellers of Betamax video cassette recorders for illegal home taping.[xv] The Court applied US law principles of contributory and vicarious liability, which bear some resemblance to the UK principles of authorisation. The Supreme Court held Betamax sellers not liable since the equipment could be used for lawful and unlawful purposes, and the sellers did not have any control over the activities of users of the equipment.

The principles from the Betamax case have been applied to peer-to-peer in the case against peer-to-peer software providers Grokster and Streamcast (providers of the Morpheus application). The US Court of Appeals held in September last year[xvi] that Grokster and Streamcast could not be held liable for the infringements of their users under US law concepts of vicarious and contributory liability, because they did not have sufficient control over users. In particular, unlike some earlier peer-to-peer systems, most notably Napster, Grokster and Streamcast did not operate a central server holding indexes of files for users to share. Also unlike Napster, they did not operate a password system whereby they could exclude particular users. Grokster and Streamcast argued that they merely provided a software application which users were free to use in whatever way they wanted, and further they had no ability to prevent the sharing of unauthorised files once the software was downloaded to users’ computers. Under US law, this level of control was not sufficient to establish contributory or vicarious liability on the part of Grokster or Streamcast. The US decision has been appealed to the US Supreme Court, which is due to hear argument at the end of March 2005.[xvii]

In the meantime, the Betamax precedent has become the paradigm model to be compared to providers of peer-to-peer software applications. Sharman Networks has consistently defended litigation in the US, the Netherlands and Australia in the same manner: on the basis that its role is to provide the technology, just like a VCR, and it has no control over how users decide to use it.

Sharman said recently that “peer-to-peer software is distributed in a pure vendor-customer setting, just as Microsoft distributes the Outlook email application and Xerox distributes photocopiers”.[xviii] Sharman applauded the US appeal decision exculpating Grokster and Streamcast, stating that “we are confident that [the US judge] will find that our product, Kazaa, is a lawful product as well”. Despite this, Sharman’s US trial lawyer has admitted that:

The [US appeal court] decision will have no precedential effect on the legal proceedings currently underway in Australia. . The doctrines of vicarious and contributory copyright infringement have been established in the US by the courts .. [A]lthough analogous doctrines are recognised by Australian courts, th principles to be applied are not identical.”

All this goes to show that the determination of Kazaa’s liability under an English law-based system is far from a fait accompli.

Double cassette decks and Kazaa down under

The analogy between Kazaa and the makers of a double cassette deck or VCR is superficially attractive. In fact however, the business model underpinning each is quite different. Lord Templeman noted in 1988 that Amstrad had no “interest in or control over” how buyers used their equipment. They had no interest in its use because the business model was to make a profit from the purchase price of the equipment. By contrast, the business model of Kazaa, and fellow peer-to-peer providers Grokster and Streamcast, is based on collecting advertising revenue from third-party advertisers who take advantage of the captive audience who are sharing files. The Grokster Court in the US found, and it was not disputed, that Grokster and Streamcast made a direct profit from infringing activity because use of the software dramatically increases if infringing files are available for download.

So the business model is different and, depending on the particular facts, the level of control over users may also be different. As to control over and monitoring of the activities of users, instead of accepting the Betamax/Amstrad paradigm, the Australians set out to find the truth about Kazaa.

You want the truth?

The Australian applicants launched proceedings with a set of Anton Piller/search order raids on 12 different sites across two states in Australia. The sites included Kazaa-related business premises, the premises of Altnet, and the homes of Kazaa and Altnet managers, as well as three ISPs associated with hosting Kazaa’s Web site within Australia, and three universities that provided hosting services to Kazaa users that were identified as active, consistent supernodes.

Anton Piller or search orders have been used in the UK since the mid-1970s to obtain evidence of infringement in circumstances where that evidence is likely to be destroyed, usually because of the dishonesty of the defendant. While this was the basic premise behind the Australian Kazaa orders, the object of the orders was to obtain a very specific type of evidence: the Australian plaintiffs wanted to observe, live, simultaneously and in real time, the behaviour of computers involved in file sharing on the Kazaa network. In the applicants’ view, this was the only way they could determine the “existence and operation of mechanisms used by the operators, programmers and administrators of the Kazaa system to control or monitor aspects of the system”.[xix]

The search orders were executed in February 2004, and survived a subsequent legal challenge.[xx]

The Trial

So, post-raid, are the Aussies any closer to the elusive ‘truth’? Of course, the full extent of the evidence and the judge’s view of it will not emerge until the court gives judgment. However, we can say that some very interesting facts are coming out of the reports of the trial in Sydney.

The experts led the way with evidence about the operation of the Kazaa system and what it would be possible for Sharman to do to control copyright infringements. A music industry expert gave evidence that not only can Kazaa gather and record statistics about user activity, including file types and download behaviours, but that they are already doing it.

The same expert also gave evidence about Kazaa’s filters, which it offers for adult content and viruses, and suggested these could be used to stop unauthorised files on the system. His evidence also stated that a standard registration process requiring users to have unique identification could be imposed on users when they accept an upgrade of the KMD. This would enable Kazaa to exclude users who were found to be infringing copyright. [xxi]

Things got more exciting when the music industry revealed a piece of evidence seized in the raids, being a database of 15 million e-mail addresses of Kazaa users, collected by Kazaa when users signed up to receive a newsletter. Other evidence showed that Kazaa had considered using the e-mail addresses for marketing purposes.[xxii]

The real fun began, however, with the cross-examination of Sharman Networks’ Chief Technology Officer, Phil Morle.[xxiii] Phil Morle was the only Sharman or Altnet witness (other than independent expert witnesses) to provide sworn evidence that was then subject to cross-examination. Morle admitted under examination from his own team, that there is a “special version of Kazaa” that gathers statistics on users. The special version of Kazaa takes the number of downloads for individual files, which are displayed on the KMD to users, and “writes it into a database”.

With Morle in the witness box, the music industry’s barrister connected to Kazaa using a laptop, and noted the laptop connecting to a server located in Denmark. Mr Morle initially denied any knowledge of any servers in Denmark. The industry’s barrister went on to highlight the evidence gathered by the industry of a bank of servers in Denmark, to which user statistics, including the number of users online at any one time, and the volume of files downloaded, were sent and recorded. While this evidence may not go as far as showing that Sharman is monitoring the type of files being shared, it does tend to indicate a much higher level of control and monitoring of user activity than a seller of a double cassette recorder or VCR.

Perhaps the most interesting and potentially damaging aspect of the evidence given at trial comes back to the gold and blue files referred to earlier. Sharman’s computer forensic expert, in the course of cross-examination, effectively admitted that Altnet’s TopSearch technology could be used to filter all files on the Kazaa network.[xxiv] TopSearch ensures that user’s keyword searches are returned to an Altnet server, which then determines which files to return in response to the search. In addition, Altnet’s customers who provide licensed files are able to trace the performance of each file, including how many times it has been downloaded and the profile of the downloader. Altnet has absolute control over the files served up to users, and routinely monitors user activity, a capacity that could be taken up by Kazaa if it chose to do so.

As more of the evidence from the trial comes to light, it appears that the mystery surrounding Kazaa will begin to lift.

The end game

So once the truth is out there, where to for Sharman and Altnet?

The question for the Australian judge at the end of the day will be twofold. First, do the proven facts about Sharman and Altnet’s monitoring and control of the system go far enough to render it liable, under Australian law, for authorising or acting in a common design to procure infringements. Secondly, if so, what should he do about it.

Both of these decisions will have an impact here in the UK. As stated earlier, the Australian law on authorisation and joint tortfeasor liability is based on (even though not identical to) that in the UK. Certainly a decision of liability in Australia should cause UK lawyers to think long and hard about its effect in the UK.

This is particularly relevant at a time when content industries in the United States are pressing for legislation (the “INDUCE” Act) which would render liable persons who encouraged or aided and abetted infringements of copyright, including via a peer-to-peer network.[xxv] The INDUCE Act proposals followed the refusal of US courts to hold peer-to-peer providers liable for infringements by their users.

The result in Australia will focus UK lawyers on the question of whether such legislation would even be required in the UK, or whether the common-law principles of common design and procuring infringement would impose liability on peer-to-peer providers in appropriate circumstances.

Filtering and legal peer-to-peer

The relief to be granted if Kazaa is liable is another key point in the Australian case. In 2001, Napster had to shut down because it could not find an effective way to block unlicensed files from its system, as it was ordered to do by the court. However, in 2005, legal peer-to-peer is a realistic possibility.

Late last year Snocap, created by none other than the creator of Napster himself, announced a new technology that would enable licensed content to be distributed by peer-to-peer systems. Snocap works by not only protecting licensed content with DRM, but also filtering out unlicensed content. While the technical and commercial success of Snocap remains to be seen, the fact that it has announced a deal with Universal Music is a major breakthrough in itself.[xxvi]

Against this background, the Australian applicants have requested various orders.[xxvii] Primarily, the applicants are seeking to have Kazaa cease operation in its current form. If it continues distributing the KMD for download, the music industry is seeking to have non-optional filters installed with the KMD, which can be automatically updated with user consent. The filters must be set to exclude search results that match keyword lists provided by the record companies. The new filtered version of Kazaa would have to be forced upon users by remote install.

The industry is also seeking to have Sharman display prominent warnings and pop-ups about copyright infringement, to terminate offending users and to collect and keep user’s correct contact information.

It is an open question what effect these orders, if made, would have on Kazaa’s worldwide operations. What is not in doubt is that the Australian decision will be closely watched and will make its mark on the international development of peer-to-peer and digital distribution.

Jo Oliver is an Associate in the IP Group at Herbert Smith and Joint Chair of SCL’s Internet Interest Group. Jo was previously a lawyer at Gilbert+Tobin in Sydney, where she was part of the team acting for the record companies in the case against Sharman and Altnet.

[i] Daily reports of the trial, written by Australian PC journalist Garth Montgomery, are available at www.apcmag.com, under the “KazaaGate” icon.

[ii] Copyright, Designs and Patents Act 1988, ss 16(1), 17, 20.

[iii] Sharman’s account of supernodes appears at www.kazaa.com/us/help/glossary/supernodes.htm

[iv] These claims and the other information in these paragraphs is available in the MGM v Grokster documents located at www.eff.org/IP/P2P/MGM_v_Grokster/.

[vii] See http://www.altnet.com/about/articles/press_release12.asp

[viii] “Filtering Kazaa Impossible – Sharman”, 9 February 2004, available at http://news.zdnet.co.uk/software/applications/0,39020384,39145657,00.htm .

[xi] The claims are outlined in the report at www.apcmag.com/apc/v3.nsf/0/D783BE3101A939CFCA256F8E00001A4B

[xii] CBS Songs Ltd v Amstrad Consumer Electronics [1988] 2 All ER 484.

[xiii] Ibid, at 493.

[xiv] Pensher Security Door Company Ltd v Sunderland City Council, Court of Appeal (Civil), 21 April 1999, (1999) IPD August 22077; MCA Records Inc v Charley Records Ltd [2001] EWCA Civ 1441.

[xv] Sony Corp of America v Universal Studios, Inc 464 US 417 (1984).

[xvi] Metro-Goldwyn-Mayer Studios, Inc v Grokster Ltd., 380 F.3d 1154 (9th Cir. 2004). Sharman Networks is a party to these proceedings, but not to this judgment for procedural reasons. The proceedings are pending against Sharman.

[xviii] Amicus Brief of Sharman Networks in MGM v Grokster, available at www.eff.org/IP/P2P/MGM_v_Grokster/20030929_sharman_amicus.pdf, page 13.

[xx] See Universal Music Australia Pty Ltd v Sharman License Holdings Ltd [2004] FCA 183 (4 March 2004)

[xxii] ibid.

[xxiii] The cross-examination of Mr Morle is reported at Kazaagate days 7, 8 and 9: see www.apcmag.com.

[xxv] More information can be found at www.publicknowledge.org/issues/s2560/resource

[xxvi] “Universal in Deal with Napster Founder”, available at www.billboard.com/bb/daily/article_display.jsp?vnu_content_id=1000718557

[xxvii] The orders sought are outlined in the report at www.apcmag.com/apc/v3.nsf/0/D783BE3101A939CFCA256F8E00001A4B